Friday, March 06, 2009

Gearino’s Informed Look At An N&O Story

A story in yesterday’s liberal/leftist Raleigh N&O began:--

Joe and Angel Bostic bought their East Raleigh home for $150,000 in 1994, when Joe Bostic had a thriving renovation business.

Now, he sits home on disability, his wife works as a teaching assistant, and a refinancing has them owing $228,000 after their monthly payments ballooned from $891 to nearly $1,700.

The couple have (sic) filed for bankruptcy, but they are hoping that help is on the way from Congress.

The U.S. House is scheduled to vote today on a bill that would allow bankruptcy judges to alter mortgage terms if no other options remain for homeowners.

Judges could extend the payment period or lower the value of the mortgage on the home to the existing market value, a process known to the industry as "cramdown."

The rest of the story’s here.

Today blogger G. D. Gearino, former N&O business editor and columnist, posted an outstanding analysis of the story in which he first presented the essentials of what reporter Barbara Barrett and her editors told readers.

Gearino followed that with “Here’s what the reader doesn’t know” and laid out what that is.

Gearino’s post probably won’t make Barrett and her editors happy. But those of you who take your journalism seriously will appreciate it.

You can read it here.

Hat tip to Gearino.


Anonymous said...

This reminds me of the "homelessness" epidemic of the early 1980's. There had been homelessness before Reagan took office but, for the mass (hysteria) media, it was important to make it look like the Gipper had brought back the Great Depression.

The Holy Grail of journalism was to find homeless white families and the search was relentless (in the same manner as they now use Muslims as "bait" to see if they get attacked at NASCAR events).

The homeless were victims, of course. Of course, none had substance abuse problems or mental illness. Their lives were perfect during the halcyon days of the Carter administration but instantly turned to kaka in January, 1981.

Sometimes bad stuff happens to good people. But Gearino is right that there is probably more to this story. With regard to the current mortgage mess, I would guess that a large majority of the "victims" are the architects of their own misery. When you have a $229K mortgage on a house that originally had a $150K mortgage, you have done something wrong. The principal is supposed to decline over time. Your house is not a cookie jar to raid.

Interestly, there was a much more balanced story about some homeless guy in yesterday's (3/8/09) N&O. It did a fair job of explaining the difficulty of getting homeless people to CHOOSE to reintegrate into society. The truth of the matter is that dogooders often are frustrated in their attempts to convince the homeless to stop being homeless. Often, hundreds of thousands of dollars are spent to get one individual off the streets. If people want to be urban campers, the dogooders should simply give them a gift card from REI so they can buy some high quality gear that will keep them warm and sheltered.

AMac said...

I looked at the numbers given in the story. The Bostics bought their home for $150,000 in 1994. Now a refinancing has them owing $228,000. Their monthly payments ballooned from $891 [presumably in 1994] to nearly $1,700 [at present].

In early 1994, the average 30-year fixed-rate mortgage rate was about 7%, then it jumped to ~8.5%. Link. If Bostic had paid 20% down and borrowed $120,000 at 8.1%, his interest plus principal would come to $889. Calculator. I guess taxes and insurance aren't included in "monthly payment". After 12 years (1994 -> 2006), Bostic would paid the loan down to about $99,000.

Bostic now owes $228,000. That's probably about what the loan was for; you generally don't pay off much or any principal in the first few years.

Perhaps Bostic refinanced in mid 2006 (around the height of the bubble). With a $228,000 loan, he would have pulled $129,000 in equity out of his home (if he only did this one refi). Had he gotten another 30-year fixed mortgage, the interest would have been about 6.2%. Payments would be $1,400--lower than the $1,700 the story cites.

But a lot of people took out "2/28" and "3/27" ARMS, where the first 2 or 3 years were interest-only payments at a low "teaser" rate. A 2/28 with a 4% teaser originated in June 2006 would have given Bostic 2 years of $855 payments (including ~$95 in private mortgage experience). A slight reduction from the prior mortgage.

Then, in June 2008 would have come the "reset" shock. If the interest reset to 7.3%, and payback of principal started, payments would have risen to $1,690, including mortgage insurance.

If this reconstruction is approximately true, it puts the story in a different light. It would mean that Bostic cashed out about $125,000 from his home while keeping his agreeably low monthly payment--knowing that by doing so, he had started a 2-year clock ticking, at which point his payments would double.

This hardly lets Bostic's banker off the hook. Every shortsighted and reckless borrower had a shortsighted and reckless banker smiling at them from across the table, willing to extend the credit.

It would be nice to have a sense of the facts behind these sob stories, before we break out the hankies. Or the bailout programs.