HOW PREDATORY LENDING WORKS.

If you've been wondering exactly how someone gets sucked into out-of-control debt, or just want to put a human face on the mortgage crisis, this Times magazine story by Edmund Andrews is must-reading. Andrews, an economics reporter for the paper who actually published early-warning stories on the dangers of sub-prime loans, gets one himself. And then another. And then he's deeply in debt. Why did he do this, even though he ought to have known better? Well, he's human.

Despite the obvious red flag of applying for a Don’t Ask, Don’t Tell loan, I wasn’t paying that much for the money. The rate on my primary mortgage of $333,700 was a remarkably low 5.625 percent for the first five years, though my monthly payments would probably jump substantially after the fifth year. On top of that, I was paying a much higher rate of 8.5 percent on my “piggyback” loan for $80,300. Even so, I would be paying slightly more than $2,500 a month for the first five years. It would get expensive eventually, but I could worry about that later.

“Don’t worry,” Bob reassured me, saying what almost everybody else in real estate was saying at that moment. “The value of your house will be higher in five years. You’ll be able to refinance.”

As I walked out of the settlement office with my loan papers, I couldn’t shake the sense of having just done something bad . . . but also kind of cool. I had just come up with almost a half-million dollars, and I had barely lifted a finger. It had been so easy and fast.

That's just step one. The entire story becomes a kind of scared-straight financial experience for the reader, and it is pretty courageous of Andrews to share his story.

The one thing that bothers me about the piece is that Andrews never uses the words "predatory lending." But that's exactly what he's experienced. "Bob" the friendly mortgage broker knows that there is no way in hell Andrews can pay off that first mortgage loan; in fact, Andrews is rejected from several higher-tier sub-prime options before he settles on the no-doc loan. But Bob doesn't care; his job is to use Andrews' credit score to get the loan made, securitized and sold. He even tells Andrews: "I am here to sell money and to help you do what you want to do. At the end of the day, it’s your signature on the mortgage — not mine.” Exactly.

The more loans Bob sells, the better for him. Andrews seems to rationalize Bob's willingness to lend as a bet on his credit score, but it's not even that -- it's merely a bet that by the time Andrews defaults, the loan will have been sold on up the chain and Bob will have collected his fees. You see that dynamic in action when Bob gets Andrew his refinancing later in the piece. This was a personal story, but the failure to identify predatory lending for what it is was surprising.

In case you're wondering, Andrews has a book coming out on his experience; I'm hoping the advance was enough to help get him back on the path to debt-free living.

-- Tim Fernholz

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