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Tough talk on all things housing -- booms, busts, bargains and more -- from "Nightline" correspondent Vicki Mabrey

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Who's to Blame for the Mortgage Meltdown?

October 20, 2008 5:46 PM

Vicki Mabrey Reports:

A lot of ABC viewers have written in expressing anger at Melanie Bruce, a homeowner in Phoenix that we profiled on the Friday, October 17th edition of "Nightline."  Melanie graciously opened her home and her life to help us illustrate a story about short sales -- when a bank agrees to the sale of a house at less than the amount owed on the current mortgage.

Apparently we didn't explain Melanie's story well enough, so I'd like to clear up a few things. 

In the story, we took the shorthand approach and just said Melanie had purchased a house with no down payment when she didn't have a job and was going back to school. All true. She also says that she had enough money in the bank to make payments for a year.  Also true.

The longer version, which we should have explained, is that Melanie is a divorced single mother, and that year's worth of payments had come from the sale of the home she had shared with her ex-husband.  She was taking a year out to go back to school to get her graduate degree in secondary education.  Though the house was purchased in her name only, Melanie had remarried, and her husband was working full time. Yes, they got a loan with no down payment, but this is not someone who is a 20-year-old college student "gaming" the system.   

Melanie says her mortgage broker told her to take the higher interest rate on the mortgage she was given, pay it for a year, and she'd be able to refinance.  I can't tell you how many people have said the same thing.  Brokers telling buyers, 'Sure, no problem, we can get a loan for you despite your lack of employment/bad credit/lack of money -- it'll just be at a higher interest rate for a while, but after a year when you prove what a good credit risk you are, you can refinance and get a lower interest rate and it'll all be so much easier.  Just sign here.'

  When that year is up, the mortgage broker is nowhere to be found, and the bank that now owns your mortgage has no interest in lowering your payment -- why would they?  You've been paying at the higher rate, they're making tons of money off your steep payments, why in the world would they lower it and make less?

Melanie Bruce found that out the hard way.  She paid for the full year -- or I should say, she and her husband paid for the full year, but then he lost his job, and the money in her savings account was running out.  She tried to refinance.  The bank wasn't interested.  Melanie could have handed in the keys and walked away, but she chose to hire an agent and try to sell the house -- unfortunately, the wrecked market showed that she had paid more than the house was worth a year later.  That's when she asked bank officials to accept a short sale. 

Banks weren't keen on short sales until just recently.  Now they figure it's better to get something than nothing  -- in Melanie's case the bank got $259,000 on a $325,000 mortgage, plus Melanie's year's worth of payments.  Banks now seem to have decided that a buyer in the hand (even for a lesser amount) beats a foreclosed home on the street that might sell for even less, and which they would have to pay to board up and hold until a buyer comes along.  Melanie and her husband will not have to make up the difference -- that's the point of a short sale. 

So people wrote hurtful things about Melanie.  But then, over the the weekend I heard an astonishing piece on NPR.  It's the edition of "This American Life" titled "The Giant Pool of Money."  In it, former mortgage brokers and bank types explain what was going on behind the scenes that caused the meltdown.  It is riveting.  So if you want to get angry with someone, listen to the program and vent at the people who relaxed standards and lied to customers, even when they knew it was going to come back to bite them -- and us. 

As for Melanie Bruce, she's teaching now and her husband has a new job.  They're getting back on their feet, but they are moving into a rental.  Some people were even upset that she mentioned in the piece how nice the place is that she was considering leasing. For crying out loud, people, does she have to give up granite countertops, too??

Just kidding. 

October 20, 2008 | Permalink | User Comments (10)

User Comments

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Are we not to blame when someone tells us something and we don't investigate and get stuck, does that make it any less our fault. Being stupid is not an excuse, it is your money take responsibility for your actions. If you take out a loan, have no job and plan to live for a year on savings and buy a house...that make you a rocket scientist??? Blame someone else....phhhttt take responsibility for your own actions.

Posted by: samhiguchi | Oct 20, 2008 6:26:05 PM

Its funny to watch the media try to write an article about something that I as an industry insider know a lot about.

The banks doing shorties is a no brainer as their 'gamble' that people would put up with the insane payments failed. Triple the foreclosures and bankruptcies occured.

Just like they will soon become even more desperate and accept the 90% HOPE guarantee instead of holding out for foreclosure.

Posted by: infoseeking | Oct 20, 2008 6:27:29 PM

Sorry, but I still stand by my original gripe. Hoping to have a job in a year doesn't seem to me to be adequate financial planning to buy something like a wide-screen TV, let alone a home. And yes, if things are so tight, granite countertops seem to be an excess.

Like you said, "this is not someone who is a 20-year-old college student 'gaming' the system." so they should have more financial sense than to dive into a major purchase based on a bunch of circumstances (good job, rising house value, lower mortgage rates, etc.) that have to happen sometime in the future for their present plan to work.

Posted by: Jim K | Oct 21, 2008 5:11:47 PM

Did you not read the part about her husband having a job?? Lots of wives don't work and rely on the husband's income to pay the mortgage. She and her ex had owned a home; she had proceeds from the sale of that home; she wanted another for her young daughter.

And I stand by my comment about the granite countertops. She was expressing surprise that such a nice amenity could be found in a $1000 a month rental. Would you prefer that they move into a cardboard box? Just because you're renting doesn't mean you have to live in a dump.

Posted by: Vicki Mabrey | Oct 21, 2008 7:28:58 PM

All facts described are why we have Bankruptcy Courts. Mrs. Bruce is not the first person to go broke, and soceity has created a process to handle it. By allowing her to get away with a letter, without court intervention, there is no true disclosure of her financial state. If she didn't wish bankruptcy, create a program where you can borrow the short sale difference. $66,000 @ 6% for 30 years is roughly $395/mo, @ 11% $675/mo. This makes her finances managable, but still requires her to fulfill her obligations. Let's not forget, if the house had doubled in value, she would have pocketed a tidy $375,000 profit, possibly tax free. It is very possible, her goal was to live in the house for a few years and flip it for a huge profit.

Ms. Bruce in effect received $66,000 gift from the bank. The gift is tax free due to a tax law change last year. And the bank got a $66,000 tax write off. Who is going to pay for this type of policy writ-large?

As to the fact that she was misinformed, she is not an uneducated person. Suzi Orman, and Dave Remsey are easily available resources. Suzi Orman targets her message specifically to Mrs. Bruce's demographic. She may have even had friends who advised her against it. Of course, she will only mention the people who gave her bad and clearly selfinterested advice.

On a moral note, I have seen many people forced to leave college, or go for years without access to their degrees, because they owe tuition that is a small fraction of Mrs. Bruce's $66,000. Given she complained, and felt victimized that she had to write a letter, that she joked about granite countertops, that she showed no appreciation to the bank that let her out of what could have been a finacially catastrophic situation, I wonder what values she his emparting on her students.

Posted by: Private Me | Oct 22, 2008 12:33:35 PM

Reality check. You are responsible for saying NO to a loan with a high interest rate. You are responsible for saying NO to a taking a loan you cannot afford on the vain hope that you might refinace later. It is your JOB to understand that bankers are there to SELL you a morgage. It is your JOB to research and learn about morgages and shop for the one you can AFFORD. I may feel sorry for this person, but her situation is her fault.

Posted by: mickey | Oct 26, 2008 10:44:01 AM

Blame Carter and Clinton and ACORN for their approach on "MULTICULTURALISM"!!!

Posted by: Stan | Nov 11, 2008 2:11:51 PM

Vicky, you ignorant slut (as Dan Akryoid would say). Your supposing that anyone would or should feel sympathy for this woman and her self created plight, only reflects your niavete and distorted sense of how to portray an important story. What this story actually portrayed was an immature woman's sense of entitlement, poor judgement and short sited economic planning, as characterizes a significant number of those who have gotten us all in this horrible economic mess! And that description originates with the moronic George Bush!

Posted by: Dave | Nov 12, 2008 8:34:43 PM

This is an old case of "monkey see monkey do".

Posted by: Change | Nov 14, 2008 8:34:52 PM

I purchased my house back in 93 when I was 22 for 67K. It was a "starter home" Modest in size 1400sf with T111 siding. I only had a high school education, but I still had enough common sense to buy with-in my means at a fixed rate of 7 percent. I have since refi the house for 15 year fixed @ 4.3 percent and still live in my home. With taxes and insurance my monthly is $660 out the door. Years ago I could have purchased a bigger house w/granite counter tops, but I refuse to do so. I believe in the saying "I'd rather own a little than owe a lot"
Bottom line, two problems with our society Sense of have now entitlement and no self responsibility.

Posted by: charles randall | Nov 18, 2008 1:09:04 PM

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