No Money Down! A Lifetime to Pay!

Welcome, friend, to the booming field of "subprime" mortgages. Think you can't afford a house? You're probably right, but that won't stop us from putting you in one!

The interest-only mortgage? You might as well kill yourself now--that's suicide. There's a six-month, a three-year, and a ten-year. The ten-year has the highest rate. Interest-only loan rates last month went up half a percent, so the payment jumped. If Greenspan keeps raising rates, you're going to lose the house.

Regardless of how good your credit is, they always offer you an interest-only loan. Mortgage brokers want to qualify the person, because that's how they get paid. The commission is higher on an interest-only because the loan is bigger. If you make four $250,000 loans in a month, that's $8,000-$10,000 for the broker.

Let's say I work for Wells Fargo. I can't qualify you at the bank, but it has an arm, Wells Fargo Financial Services, that will qualify you. They all do--US Bank Financial, TCF Help You Lend, Countrywide--and they're all ready to explode. I think when you get caught up in the game, you're gonna get in trouble.

--A rising star in the Minneapolis office of a highly esteemed financial services firm on the explosively popular interest-only loan, which makes up one-fourth of all mortgages made in Minnesota this year.

 

The townhouse where John and Rosalie Marolt live is the sort of place where people typically just make do. A single small space does triple duty as living room, dining room, and kitchen. It's very sparsely furnished, and outfitted with pebbly-surfaced sheet vinyl and wood-tone cabinetry and other materials that look tired and cheap even though they're brand-new. The extra window it's afforded as the end unit looks out on mud and weeds and a sagging stack of trusses that hints at more rows of townhouses to come. Yet somehow it's clean and bright and cheerful.

The Marolts have been renting this place in Zimmerman, a dozen miles north of Elk River, for a year, ever since it became clear that they were going to lose the house they'd owned for 14 years, that the succession of ever-bigger mortgages that were supposed to keep their heads above water were in fact drowning them, that what they might have accumulated instead got siphoned off by a series of creditors who specialized in dangling lifelines to desperate families. They simply let go of the house, 1,000 square feet of hardboard siding and fake shutters in a rundown neighborhood a few blocks away, moved their things out, and let the sheriff deliver it back to the bank.

The paperwork documenting the various loans makes it clear that the Marolts are chronic debtors. As soon as one refi wipes out a car payment or a credit card balance of a few thousand dollars, they begin to accumulate new debt. But a look around the rented townhouse also suggests that if they are living beyond their means, they certainly aren't living high on the hog. There's no big TV, no stereo system, no shiny kitchen gadgetry. No vacation souvenirs or decorative touches. The only signs of spending are the cars, Rosalie's 2002 Saturn sedan and John's 2000.

Mostly, it looks more like they couldn't stay out of debt because they couldn't make ends meet. John, 59, recently retired from three decades working as a janitor for the Fridley schools. Rosalie, 56, worked at a grocery store decorating cakes. Including a disability payment John gets and a stipend for their adopted nine-year-old daughter, they were bringing home a little more than $3,000 a month, out of which they had to pay for insurance, too.

The Marolts know exactly how their finances got so out of control. "They say you should have six months living expenses in a savings account, but that's impossible when your wages don't keep up with inflation," says Rosalie. "We couldn't catch up, so we had to use [credit cards] to buy groceries. So we were always getting further and further in the hole."

Like millions of Americans, they paid off those credit cards with a home equity loan, which consumers are increasingly encouraged to think of as money in the bank. When those payments proved unmanageable, too, they began to listen to the telemarketers who called offering new mortgages held up as quick fixes to the Marolts' problems.

It seemed too good to be true. "Our credit isn't the best. If I were a loan officer, I never would have made us a loan," Rosalie says. "They keep on telling you, 'This is good for you, this will get you out of the hole.'"

For hundreds of thousands of people, easy credit has proven the modern-day equivalent of the plantation store: Every transaction puts them a little further from financial freedom. Adding insult to injury, the more the debtor needs the credit, the more expensive the terms are likely to be. With interest rates hovering near 40-year lows, people with low incomes and imperfect credit histories now routinely pay rates that were illegal 25 years ago. Rates routinely start above 9 or 10 percent; if homeowners can't refinance before introductory "teaser" rates expire, they often find themselves paying 15 percent.

At least in the short term, however, unrestrained borrowing has been terrific for U.S. business. With the stock market a continuing disappointment and salaried jobs being outsourced and replaced by low-wage service-sector jobs, credit has been the engine driving the U.S. economy since 9/11. "The [housing] bubble, and the easy money that's financed it, has been crucial to the economic recovery since 2001," writes Doug Henwood, author of After the New Economy and editor of the Left Business Observer. "By one measure (that of Asha Bangalore of Northern Trust), housing has contributed over 40 percent of the cycle's employment growth. Building and remodeling are contributing a near-record share of GDP. Real estate has accounted for 70 percent of the increase in household wealth over the same period."

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