House price: $3,500. Mortgage: $228,000

Posted by: Peter Coy on February 2, 2008

True story. In reporting for my cover story in this week’s issue on the housing market, Meltdown, I spoke with a 73-year-old man named George Clark. In 1977, Clark and his wife Mollie, who have six children, bought a four-bedroom house in North Minneapois for just $3,500. Things were fine until a few years ago, when they started getting bombarded by offers of new mortgages and home-equity loans. “We would get these calls and letters all the time. They were saying, ‘I can put some money in your pocket,’” recalls Clark. “These guys sounded so honest, we thought they were on the level.”

The Clarks had a pile of credit-card debt and needed some work done on the house and the car, so finally they bit. They didn’t consult a lawyer. They signed a thick stack of papers without reading any of them or having a real concept of what they were getting into.

It turned out that they had legally sworn, by their signatures, that Molly, who is also 73 and whose sole income is about $800 a month in Social Security, was earning $6,000 a month. They had paid an appraiser $4,000 to certify that the house was worth more than the loan. They had also taken on an adjustable-rate loan with a sharp payment escalation built in. The monthly payment began at around $1,300 and has since risen in steps to $2,300, which is more than the Clarks’ combined monthly income.

Ordinarily the Clarks might sell, but the amount they owe, $228,000, exceeds what they could get for the house if they sold now. It’s appraised at $174,000, and that may be high.

The Clarks have made the rounds of social-service agencies asking for help, but none of them has been able to get the mortgage servicing company to cut a deal. The servicer says its hands are tied.

Says Clark: “I don’t know what to do now. Every night can’t hardly sleep wondering if they’re going to snatch your house away from you.”

A neighbor told him it was all part of a scheme by white people to force the blacks of North Minneapolis out so they could move into the neighborhood, which has nice homes and is convenient to downtown. Mr. Clark isn’t quite prepared to believe that, but the whole experience has left him deeply disillusioned.

Reader Comments

California homeowner

February 2, 2008 10:58 AM

This post is yet another attempt to humanize the mortgage crisis by highlighting the plight of its victims...

Here's another way to view the circumstances: a couple pays $3,500 for a house. The couple receives $228k (even though the house is only worth $174k) and ruined credit scores, in exchange for their home...

Was fraud committed against them? Probably, yes. But it sounds like they got a nice payout, well above both what they paid and more than what the house was worth. No mention of that fact in the article.

Jim D

February 2, 2008 1:24 PM

You're leaving out one part - how much of the money they took out did they spend? Is any left? Or are they asking for it to be "Free Money" where they get to spend it, and don't have consequences...

No sympathy (ok, not enough to spend money, anyway). Folks get into credit troubles all the time - with credit cards, with car loans, and I'm not required to bail them out with my taxes.

So they don't have a house? Big deal. Neither do I. Now that they've spent the money, they need to rent.

Joe Zekas

February 2, 2008 7:00 PM

So finish the story ... what happened to the $200k+ in cash that the couple took out? Or does that have no relevance to the story?

Lisa Dunn

February 3, 2008 7:53 AM

Today there isn't any kind of process to right this kind of wrong. It sounds like the Clarks were in some financial difficulty with credit card debt before the sharks came along. Appraisers work for the bank to be sure the banks aren't loaning more than the house is worth. In Minneapolis appraisals cost between $300-$400, certainly not $4000. Good Faith Estimates are required by mortgage officers. They exist so the consumer can understand the fees and their new monthly payment on a new mortgage. The Clarks either didn't get one, or didn'nt take the time to understand it and now are paying some hefy consequences. As a Minneapolis real estate agent, it breaks my heart.

Lane Bailey

February 3, 2008 5:17 PM

you know... I'm not believing you. $35,000 I could bite, but not $3,500 in 1977. Using the Minneapolis Federal Reserve Bank Constant Dollar Calculator, that pegs the price for this house at $12,452.15 in 2008 dollars.
http://woodrow.mpls.frb.fed.us/research/data/us/calc/

So, unless you can show that, the rest of the story is suspect.

Now, on the the rest of the story... They wanted to do a little work on the house and fix a little credit card debt, so they got $228,000... How much credit card debt is that?

Again, I think you are trying to stretch a story to prove a point.

The flip side is that these folks took out a loan that they didn't understand and didn't even bother to read. Was that a good idea? I don't think so. Does that make them blameless? Absolutely not.

The lender wasn't very bright either... and they are going to pay a price for their failure to excercise good judgement... so should the borrower. Maybe if they sold the bass boat, the big screen TV, the two new cars and the groovy cool stuff they bought with that money they could afford to get out from under the loan.

Next time at least try to find some more realistic numbers.

LIONESS

February 4, 2008 9:03 AM

IT IS OBVIOUS THAT THE CLARKS WERE SWINDLED, AS WERE MANY PEOPLE NOW FACING THE LOSS OF THEIR HOMES. THE SWINDLERS WHO TOOK ADVANTAGE OF THEM AND MANY OTHERS AS WELL AS CROOKED APPRAISERS SHOULD BE PROSCUTED TO ASSURE THIS WILL NEVER HAPPEN AGAIN. THEY ARE THE REAL VICTIMS, NOT THE BANKS WHO LOOKED THE OTHER WAY AND NOW AS A REWARD CAN BORROW CHEAPLY FROM THE GOVERNMENT. THE PEOPLE WHO WERE VICTIMIZED, WHO RELIED ON FALSE ASSURANCES AND CANNOT POSSIBLY AFFORD THESE MORTGAGES SHOULD BE THE ONES THE GOVERNMENT BAILS OUT. THE GOVERNMENT SHOULD REQUIRE THAT BANKS AND MORTGAGE COMPANIES WHO CAN NOW BORROW QUITE CHEAPLY THEMSELVES PASS ON THESE INTEREST SAVINGS AND PROVIDE RELIEF TO THOSE "VICTIMS" WHO TOOK OUT MORTGAGES IN GOOD FAITH, BUT WERE CLUELESS AS TO WHAT THEY WERE GETTING INTO . ALL WE KEEP HEARING ABOUT IS THE POOR BANKS WHO SWINDLED THOSE WHO LACKED KNOWLEDGE OF FINANCING. THESE BANKERS HAVE DESTROYED COUNTLESS LIVES, SHOULD BE HELD ACCOUNTABLE AND REQUIRED TO RESTRUCTURE THE DISHONESTLY OBTAINED MORTGAGES SO THAT PEOPLE DO NOT LOOSE THEIR HOMES, ESPECIALLY PEOPLE LIKE THE CLARKS WHO HAVE LIVED IN THESE HOMES FOR MANY YEARS. HAD THESE MORTGAGES BEEN HONESTLY PRESENTED BY THEIR AGENTS AS THEY SHOULD HAVE BEEN, THEY WOULD NOT NOW BE FACING FORCLOSURE, AND THERE SHOULD BE A RESCUE PROGRAM FOR THESE VICTIMS OF THE GREEDY BANKERS WITH THEIR ADVANCED FINANCIAL KNOWLEDGE AND LACK OF MORAL ETHICS . THEY SHOULD BE REQUIRED TO PASS ON THESE NOW LOW INTEREST RATES TO THEIR VICTIMS.

BusinessWeek Economics Editor Peter Coy

February 4, 2008 5:38 PM

I'd like to respond to several of the perceptive comments I got about this blog item:
1. I agree that the Clarks are far from blameless. They got a huge amount of money out of this, after all. The biggest loser is whoever holds the mortgage. That may well be some retiree who owns mortgage-backed securities.
2. The $3,500 purchase price sounds very low, I know, but the social-service agency I spoke with confirmed the number.

John Bougearel

February 4, 2008 10:43 PM

Peter,

The deepening housing recession has even the Federal Reserve gravely concerned.

The main and obvious conclusion to their sudden and aggressive rates is testament to the fact that Fed is “more than worried” about the economy and financial markets.”

‘More than worried’ is an understatement.

I spent a good deal reflecting on the ever worsening housing recession this weekend, and it prompted me to review the Great Depression of the 1930’s as it was experienced by some of the brightest economists of that era.

I then juxtaposed their observations and experiences with some grave concerns and observations regarding the evolving housing crisis from the brightest economists of our own era.

I have posted these musings and reflections on my blogsite SuccessfulTradingTips.com over this weekend. Some of your readers I thought may find it a worthwhile read - it can be found in the second post from the top (as of now).

The reflections are admittedly a bit Cassandra-like, but with the risks to the economy unbalanced as they are to the downside at this juncture, a cruise down memory lane was worth the trip for me.

Best
John Bougearel

dean

February 5, 2008 10:15 AM

People aren't that stupid--they understood what they were getting into. There's no free lunch and the taxpayers shouldn't pay for the greedy and reckless behavior of others now that this ponzi-scheme of housing is over. The prudent shouldn't pay for those who live beyond their means.

Bruce

February 5, 2008 4:56 PM

Bull, I am so tried of hearing of the poor DUMB family who did not look into what they were getting them selfs into ( lazy is a better word ) bottom line is if you are an adult you MUST take responibillity of your actions.

tommyd

February 6, 2008 12:48 PM

I understand the Clarks dilemma. I own 20+ properties and none will every be in default. However, the fact is I was prey to a conspiracy between a property owner, mortgage broker, real estate agent and appraiser on a property I bought for $270K. I cannot list the lies and deceptions perpetrated including interest rates (please I had a lawyer read the 20+ pages and he did not catch this one). Although it was ARM, it stated I could lock-in a 30 year fixed at my option. The agent left state, the mortgage broker is rich and the appraiser is out of business. I am suing.

Nemoudeis

February 6, 2008 7:22 PM

To anyone who knows anything about North Minneapolis, $3500 in 1978 dollars may be lowball, but not at all out of the range of possibility. The place has for decades been regarded by the locals as a crime-wracked combat zone. There's also no indication of what CONDITION the house was in at the time the Clarks bought it.

And what's $3500 in modern currency -- about $12000 dollars? We may still be a little ways from that price point yet for North Minneapolis properties, but we're getting close. The neighborhoods on Minneapolis' north side are an absolute mess right now financially -- they're emptying out at an alarming rate, and are probably the worst hit area in the Twin Cities at the moment.

Want an example? Just Google "3100 Dupont" and "Minneapolis" to take a look at a 1700-square-foot house on the north side that's currently on the market for less than $20000.

Joe

February 22, 2008 1:31 PM

Sounds like the old timers ripped off the mortgage broker. They received $228K for a house valued at $175K, which they owned all the equity. So they take the $228K pay off their credit cards, abandon the house, move to Florida, purchase a condo with the cash using an LLC for asset protection. The bank gets stuck with a 30 year old house at a 24% loss. The city looses tax revenue and the old timers enjoy the rest of their retirement in sunny Florida in a condo they would not have been able to afford if they sold their home at market value.

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About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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