May 17, 2009 / copyright NY Times
My Personal Credit Crisis By EDMUND L. ANDREWS /
an economics reporter for The New York Times

If there was anybody who should have avoided the mortgage catastrophe, it was I.

As an economics reporter for The New York Times, I have been the paper’s chief
eyes and ears on the Federal Reserve for the past six years. I watched Alan
Greenspan and his successor, Ben S. Bernanke, at close range. I wrote several
early-warning articles in 2004 about the spike in go-go mortgages.

Before that, I had a hand in covering the Asian financial crisis of 1997, the
Russia meltdown in 1998 and the dot-com collapse in 2000.

I know a lot about the curveballs that the economy can throw at us.

But in 2004, I joined millions of otherwise-sane Americans in what we now
know was a catastrophic binge on overpriced real estate and reckless
mortgages.

Nobody duped or hypnotized me. Like so many others — borrowers,
lenders and the Wall Street dealmakers behind them — I just thought I could
beat the odds. We all had our reasons. The brokers and dealmakers were
scoring huge commissions. Ordinary homebuyers were stretching to get into
first houses, or bigger houses, or better neighborhoods. Some were greedy,
some were desperate and some were deceived.

As for me, I had two utterly compelling reasons for taking the
plunge: the money was there, and I was in love. It was August 2004, just as
the mortgage party was getting really good. I was 48 years old and eager to
start a new chapter in my life with Patricia Barreiro, who was then my
fiancée.

Patty was brainy, regal, sexy, fiery and eclectic. She was one of my closest
friends when we were both students at an American high school in Argentina.
Back then, we would talk together about politics and books at a coffee shop
every day after school. We were not romantic in those days and went our
separate ways after high school. But each of us would go through bruising
two-decade-long marriages, and we felt that sweet spark of remembrance and
renewal upon meeting again in middle age.

After a one-year bicoastal courtship, Patty was about to move from her home
in Los Angeles to Washington. We would need a home with enough space for her
two youngest children, as well as for my own teenage boys on the weekends. I
had assumed we would start by renting a house or an apartment, but it
quickly became clear that it was almost easier to borrow a half-million
dollars and buy something.

Patty discovered a small but stately brick home in a leafy, kid-filled
neighborhood in Silver Spring, Md. We sent in an offer of $460,000 and one
day later got our answer: the sellers accepted. I felt both amazed and
exhilarated, convinced that the stars had aligned for us. I loved the house
as soon as I saw it. It was one block from a school and a park. My boys
would be within a 15-minute drive, and it would be easy for them to come
over and stay whenever they wanted.

The only problem was money. Having separated from my wife of 21 years, who
had physical custody of our sons, I was handing over $4,000 a month in
alimony and child-support payments. That left me with take-home pay of
$2,777, barely enough to make ends meet in a one-bedroom rental apartment.
Patty had yet to even look for a job. At any other time in history, the idea
of someone like me borrowing more than $400,000 would have seemed insane.
But this was unlike any other time in history. My real estate agent gave me
the number of Bob Andrews, a loan officer at American Home Mortgage
Corporation. Bob wasn’t related to me, and I had never heard of his company.
“Bob can be very helpful,” my agent explained. “He specializes in unusual
situations.”

Bob returned my call right away. “How big a mortgage do you think you’ll
need?” he asked.

“My situation is a little complicated,” I warned. I told him about my child
support and alimony payments and said I was banking on Patty to earn enough
money to keep us afloat. Bob cut me off. “I specialize in challenges,” he
said confidently.

As I quickly found out, American Home Mortgage had become one of the
fastest-growing mortgage lenders in the country. One of its specialties was
serving people just like me: borrowers with good credit scores who wanted to
stretch their finances far beyond what our incomes could justify. In
industry jargon, we were “Alt-A” customers, and we usually paid slightly
higher rates for the privilege of concealing our financial weaknesses.
I thought I knew a lot about go-go mortgages. I had already written several
articles about the explosive growth of liar’s loans, no-money-down loans,
interest-only loans and other even more exotic mortgages. I had interviewed
people with very modest incomes who had taken out big loans. Yet for all
that, I was stunned at how much money people were willing to throw at me.
Bob called back the next morning. “Your credit scores are almost perfect,”
he said happily. “Based on your income, you can qualify for a mortgage of
about $500,000.”

What about my alimony and child-support obligations? No need to mention
them. What would happen when they saw the automatic withholdings in my
paycheck? No need to show them. If I wanted to buy a house, Bob figured, it
was my job to decide whether I could afford it.

His job was to make it happen.

“I am here to enable dreams,” he explained to me long afterward.
Bob’s view was that if I’d been unemployed for seven years and didn’t have a
dime to my name but I wanted a house, he wouldn’t question my prudence. “Who
am I to tell you that you shouldn’t do what you want to do? 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.”

You had to admire this muscular logic. My lenders weren’t assuming that I
was an angel. They were betting that a default would be more painful to me
than to them. If I wanted to take a risk, for whatever reason, they were not
going to second-guess me. What mattered more than anything, Bob explained,
was a person’s credit record. History seemed to show that the most important
predictor of whether people defaulted on their mortgages was their “FICO”
score (named after the Fair Isaac Corporation, which developed the main
rating system). If you always paid your debts on time before, the theory
went, you would probably keep paying on time in the future.

Bob’s original plan was to write two mortgages, one for 80 percent of the
purchase price and a piggyback loan for 10 percent. I would kick in the
final 10 percent, cashing out a chunk of New York Times stock — my last. If
I had been a normal borrower, the whole deal would have sailed through at a
low interest rate. My $120,000 base salary and my assets were easy to
document. But given my actual income after alimony and child support, I
couldn’t possibly have qualified for a standard mortgage. Bob’s plan was to
write a “stated-income loan,” or “liar’s loan,” so that I wouldn’t have to
give the game away by producing paychecks or tax returns.

Unfortunately, Bob’s plan hit a snag a few days later. “Ed, the underwriters
say that your name is on another mortgage,” he told me.

“That means you’re carrying too much debt.”

The mortgage was on my old house, which I had turned over to my ex-wife. As
part of our separation agreement, she accepted full legal responsibility for
making the payments. But the separation agreement also spelled out exactly
how much I had to pay each month to my ex-wife. If we showed it to the
underwriters, they would reject me.

Bob didn’t get flustered. If Plan A didn’t work, he would simply move down
another step on the ladder of credibility. Instead of “stating” my income
without documenting it, I would take out a “no ratio” mortgage and not state
my income at all. For the price of a slightly higher interest rate, American
Home would verify my assets, but that was it. Because I wasn’t stating my
income, I couldn’t have a debt-to-income ratio, and therefore, I couldn’t
have too much debt. I could have had four other mortgages, and it wouldn’t
have mattered.

American Home was practically begging me to take the money.

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. Almost fun. I couldn’t
help feeling like a high roller, a sophisticated player who could lay his
hands on big money at a moment’s notice. Despite my nagging anxiety about
the gamble that Patty and I were taking, I had whipped through the pile of
loan documents in less than 45 minutes.

The icy slap of reality hit me two weeks after New Year’s Day in January
2005. We had been living in our new house for five months. I walked out of
The Times’s Washington bureau, several blocks from the White House, and
crossed Farragut Square to my bank. I had a bad feeling about what the
A.T.M. would reveal about my balance, but I was shocked when I looked at the
receipt: $196. We were broke.

My stomach churning, I reached Patty on her cellphone as she was running
errands. “We are out of money,” I snapped, skipping over any warm-up chat.
“What do you mean, we’re out of money?” she asked in bewilderment.
“I mean, I just checked my bank account, and we are out of money,” I
repeated, my voice rising in panic. “We can’t buy anything!”

My next paycheck would come in about a day or so, but that was entirely
reserved for the February mortgage payment. We didn’t have enough cash to
cover more than a week’s worth of groceries and gasoline. For the last few
months we were living off the cash left over after I sold my Times stock and
we bought the house. But now it was gone.

“How the hell could we have run through so much money so quickly?” I asked
her accusingly.

Patty wasn’t sharing my shock. “I don’t know what’s going on,” she
responded. “Let’s talk about it when you get home.”

Patty had spent much of the two previous decades as a stay-at-home mother in
Los Angeles. Her last full-time job, as an editor at a political research
company, was back in the early 1980s. Not surprisingly, Patty’s re-entry
into the job market was bumpy. When Saks Fifth Avenue offered her a
full-time job selling high-end clothing on commission — something she knew
about and loved — she grabbed it. But with her take-home income averaging
only about $2,400 a month, we didn’t make enough to cover our bills because
my take-home pay was going straight to the mortgage. We were spending way
more than we were earning.

In the euphoria of moving in together, we both succumbed to magical thinking
about ourselves, as well as about money. My fantasy was that Patty would
become an ambitious go-getter. “This can really be an exciting new chapter
of your life,” I kept telling her. Patty had a very different dream. “I feel
as if I am finally at home,” she exclaimed as soon as we moved into the
house. She could settle down and do the things she had always been best at:
making a new home, nurturing her children and loving me. One way or another,
she figured, we would earn enough money to make good on our glorious gamble.
We had very different ideas about money. Patty spent little on herself, but
she refused to scrimp on top-quality produce, Starbucks coffee, bottled
juices, fresh cheeses and clothing for the children and for me. She
regularly bought me new shirts and ties to replace the frayed and drab ones
in my closet. She thought it wasn’t worth agonizing over nickels and dimes.
I was almost exactly the opposite. My answer to any money squeeze was to
stop spending. I would skip lunch at work to save $7. If I arrived at the
Metro just before the end of rush hour, I would wait for five minutes to
save 50 cents on the fare.

We were both building up grudges. “You can’t keep second-guessing me,” she
told me angrily. “It’s small-minded and petty, and it’s not very
attractive.” I was beginning to wonder whether she had any clue about how
money worked. We were lurching from paycheck to paycheck, one big home
repair away from disaster.

Meanwhile, neither of us was paying attention to how easy our bank had made
it to build up debt. The key was the overdraft protection — more accurately
described as “bounced-check loans.” Every time I overdrew my checking
account by even a few dollars, the bank would tap my MasterCard for $100,
helpfully deposit the cash in my account and charge me $10 for the
privilege.

Patty and I were now unwittingly tapping into our credit line at a
terrifying pace: $5 overdrawn because of school supplies for Patty’s
daughter Emily — $100 from the MasterCard. Fifteen bucks over because of
gasoline? Another $100 from the MasterCard. Groceries for $305? No problem!
Uncle MasterCard would front us $400.

Our debt spiraled up faster than I had ever dreamed possible. Chase Bank had
cold-called me to offer a “platinum” card with no interest charges for the
first six months. I took them up on it and shifted $3,000 in debt from my
old card onto the new Chase card. But instead of paying down the balance
before the interest charges began, I let it balloon to $6,000. Chase had
sent us blank checks that we could use to either pay bills or give ourselves
cash advances. I dismissed them as a cheap trick to lure dimwits into
borrowing more money. In March, I grabbed one of the checks and used it to
pay down $1,000 on my more expensive credit card.

I felt like a crack addict calling up my dealer. It was April 2006, and I
had just reached Bob Andrews, our once and future mortgage broker, on his
cellphone.

I was surprised at how glad I was to hear his voice. In his own way, Bob
knew more about my messy life than almost anybody else. He never seemed
judgmental or condescending. Instead, he seemed to think that money trouble
and failed marriages were natural parts of life, even for good people with
decent jobs. I felt relieved to have the chance to unload my problems and
ask for his advice.

“Bob, we’re dying over here,” I wailed. “I can’t even explain how it
happened, but we’ve got these unbelievable credit-card bills, and the
minimum payments add up to almost $1,100 a month. There’s no way we can keep
that up.”

I had months and months of credit-card bills spread across the dining-room
table, and I quickly confessed the full horror of what they contained. We
were approaching $50,000 in credit-card debt alone, and it was amazing how
fast and how deeply we had dug ourselves in. It was even more amazing how
long we had avoided the screaming evidence of a train wreck in the making.

Patty had suddenly got the break that seemed to solve our problems.

In November 2005, she was hired as a full-time editor at a nonprofit
organization with a salary of $60,000 a year. The problem, I told Bob, was
that things were so bad that even Patty’s new job wouldn’t be enough to
rescue us. Chase was now charging us 13.99 percent on our platinum card, and
the rate on our SunTrust card was up to 27 percent.

Between humongous loan balances and high rates, we had hung ourselves with
the rope they gave us. In the previous December alone, we charged $2,845 on
the Chase card for Christmas gifts, food, gasoline, clothing and other
expenses. The charges included almost $350 for groceries, $700 in clothes
from J. Crew, $179 at GapKids and $700 for airplane tickets for two of
Patty’s children to visit their father in Los Angeles. Our balance climbed
from $14,118 to $17,135, and in January 2006 we maxed out at our $19,000
credit limit. And there were other expenses on other cards: $1,200 in dental
work for Patty’s son Ben; $1,600 to rent a beach house the previous year for
us and all the children. Granted, the beach house was an embarrassing
mistake. But given that Patty had landed a solid job, it seemed like an
indulgence we could work off later.

I felt foolish, ashamed and angry as I confessed to Bob. Why had I been
trying to live a lifestyle that I couldn’t afford? Why had I tried to keep
up the image of a conventional suburban family man, when nothing about my
situation was conventional? How could I have glossed over the fact that we
had been spending about $3,000 more than we were earning, month after month
after month? How could a person who wrote about economics for a living fall
into the kind of credit-card trap that consumer groups had warned about for
years?

“My inclination is to just raid my 401(k) account to pay off the cards,” I
told Bob. “I know we’d be paying huge taxes and penalties for withdrawing
money before retirement, but it’s not as bad as paying all that interest to
the banks.”

“No!” Bob interrupted fiercely. “You don’t want to do that. You’ll be paying
a basic tax rate of 28 percent, and they’ll hit you with another 10 percent
penalty. You’d be giving up 40 percent in taxes.

There’s got to be a better way.”

I gave Bob permission to pull a credit report on us, and by the next day, he
had come up with a scheme that was either wickedly smart or proof that the
big-money people had gone mad. Or both.

“What we’re going to do is a two-step plan,” he announced. “The bad news is
that your credit scores are down, so we can’t just do a simple refinance.
But the good news is that you’ve owned your house for a year and a half, and
it’s gone up in value. So you can borrow against the equity. So in the first
step of the plan, we’re going to get you a really ugly mortgage that is big
enough to pay off all your credit cards.”

“O.K., I’m with you so far,” I said uncertainly.

“Now, because this mortgage is really ugly, your monthly payments will jump
to about $3,700. But don’t worry about it, because you’re only going to stay
in it for about three months. Once we pay off your credit cards, your credit
scores will go up and we can get you a cheaper loan.”

The way Bob figured it, my monthly payment would be down to about $3,200
by the fall. The new mortgage would be nearly $700 more than my current
mortgage because it would include all my credit-card debt, but it would be
at least $500 a month less than the combined total of what I was paying on
everything right then. And mortgage interest, unlike interest on credit-card
debt, is entirely tax-deductible.

The whole plan worked exactly as Bob had predicted. Within a few weeks, an
appraiser valued our house at $505,000, almost 10 percent above the original
purchase price two years earlier. On June 12, Patty and I signed a new
mortgage for $472,000 with Fremont Investment and Loan in Santa Monica,
Calif.

Fremont gave us a classic subprime loan. Our monthly payment jumped to
$3,700 from $2,500. If we kept the mortgage for two years, the interest rate
would jump as high as 11.5 percent, and the monthly payments would ratchet
up to as high as $4,500.

The paperwork was so confusing that I was never exactly sure who was paying
what. I hazily understood that I was paying most of the fees, one way or
another, but I couldn’t figure out how, and I couldn’t see any better
alternatives. After it was all over, I figured we had paid about $5,800 in
fees to Bob’s mortgage company and the settlement company, on top of the
sales commission that came out in higher interest rates every month. But
Patty and I paid off our credit cards, and my credit scores jumped. In
October 2006, Bob refinanced us once again, and our payments dropped just as
he had predicted.

We were still loaded with debt, but we weren’t paying 27 percent interest
rates on our credit cards. Patty was earning a solid salary, and I was
earning extra money working overtime at The Times. If we were careful, we
could meet our monthly expenses, chip away at our debt and even go out to
dinner once in a while.

Our brief interlude of optimism and peace ended on Oct. 10, 2006, when Patty
lost her job. “Don’t worry,” she said bravely. “This will not be like the
first time I was looking for a job. I’ve learned so much since then, and I
am going to find another job quickly.” In the meantime, she said, she could
collect unemployment for six months. She would also cash out her retirement
account, which had about $7,000 in it.

By any measure, the loss of Patty’s job was a financial catastrophe.
We hadn’t yet gone more than 30 days delinquent on the mortgage, thanks, in
part, to $15,000 I had borrowed shamefacedly from my mother after Patty
stopped working. But we were behind on everything else.

Bill collectors were calling six days a week, starting promptly at 8 a.m.
“Telemarketers,” I would mumble when my son Matthew asked why we got so many
robocalls from 800 numbers. Our stately little house looked increasingly
trashy: peeling paint and broken screens on the front windows, crumbling
concrete on the front stoop, a lawn that was mostly crabgrass. The furniture
that Patty salvaged from her first marriage was falling apart. The cotton
slipcovers on the sofa and armchair were in shreds. The frosted-crystal
shade on a beloved Italian floor lamp was cracked. The dog had gnawed the
leg on her Biedermeier chair.

The panic attack hit me around 2 a.m. on Patty’s birthday. It was Oct. 17,
2007, and I was lying in bed obsessing over bills that couldn’t be postponed
and the money we didn’t have to pay them. Like many of my predawn fear
cascades, this one had its start with a specific unpaid bill: $240 in
traffic tickets — $140 for speeding, $50 each for expired tags and
inspection. The fines would double if we didn’t pay them in less than a
week. The tickets had uncorked the bottle on all the other “must pays”: the
$400 electric bill with the cutoff date printed in red; the $220
cable/telephone/Internet bill for the past two months; the MasterCard and
American Express bills — at least one of which had to be brought current or
I wouldn’t even be able to travel for work. And of course, there was the
$3,271 mortgage payment.

My panic circuitry was in fine form, connecting small debts to big ones,
short-term problems to the bottomless abyss, private calamity to public
shame. Once Patty was asleep and I was alone in the dark, the bottled-up
fear reached the surface. I tossed from side to side, trying to figure out
at least a triage plan for our bills. I was too fidgety to lie still in bed,
but I was in no mood to actually sit down with the bills themselves. I
climbed out of bed for a moment, then jumped back in. I couldn’t decide if I
would rather feel confined or all alone.

Patty woke up, irritated by all my movement and my occasional moans of
despair. “What’s the matter?” she asked.

“I can’t sleep,” I answered. “I’m panicking about money, because I don’t
know how we’re going to pay all the bills that need to be paid right now.” I
wanted her to take me in her arms and reassure me that everything would be
O.K. But that wasn’t happening.

“There’s nothing you can do about it right now,” she answered sleepily.
“If this keeps on, we’re going to lose the house,” I persisted, sounding
less panicked than petulant. If Patty wouldn’t give me comfort, then I
wanted her to suffer alongside me. “I don’t know how we’re going to make it.

We can’t go on like this.”

Patty had begged me to grant her a birthday reprieve from my nagging and
kvetching over money issues. What I saw as an uncontrollable moment of
panic, she saw as another deliberate attempt to browbeat her.

“I can’t believe you are doing this to me on my birthday,” she hissed in
fury. “All I asked for was one day of peace — one day when you weren’t
beating me over the head. And here it is, not even daylight yet, and you’re
waking me up to berate me about money.”

“Son of a bitch, what did I do to you?” I asked, punching my pillow in the
dark. “Do you think I enjoy having a panic attack? I can’t help what I’m
feeling. I’m just scared out of my mind.”

“That’s it!” Patty snapped, getting out of bed and pulling on her robe. “I’m
not going to listen to any more of this. I’m going to sleep downstairs.”
In the morning, she let me have it.

“You lied to me,” she told me as I got coffee. “You said that what I saw on
the outside was pretty much what you were. But you’re completely different.
If I had known what you were really like, I would never have come out here.”
Patty and I were hurtling toward bottom. We had been under so much strain
for so long that we were often at each other’s throats, jeopardizing the
love that brought us together in the first place. In November, four years
after buying the house, we finally crossed our personal Rubicon and fell 30
days behind on our mortgage.

“The last thing Chase wants is to foreclose on your home,” JPMorgan Chase
wrote us. It assured us that it wanted to “help” and was willing to evaluate
us for a number of “alternatives.” If we didn’t “resolve” our payment
delinquency, it politely warned, “you will lose your home.”

I took a certain pride that I outlasted two of my three mortgage lenders.
American Home, my original lender, collapsed overnight when the financial
markets first froze up in August 2007. Fremont, my second lender, was forced
out of the mortgage business by federal regulators. That left me with
JPMorgan Chase, one of the few big banks smart enough to sell off most of
the subprime loans it financed. It still serviced my loan, but it wasn’t on
the hook if I defaulted.

By the time that Patty and I fell behind, the rest of the world was falling
apart so fast that Chase barely had time for us. Bear Stearns and Lehman
Brothers were gone. American International Group, one of the world’s biggest
insurance conglomerates, received the biggest taxpayer-financed bailout in
history. Citigroup was a zombie bank. All of them were brought down by the
same mortgage madness that infected me.

When I first called Chase in October, a representative named Sarah said I
didn’t qualify for a loan modification because I wasn’t yet 90 days past
due. The only “loan modification” she could offer me was a “repayment plan”
under which I paid $400 more per month for six months until I was current
again.

“It sounds as if I would be better off waiting to fall 90 days behind,” I
said. “I think I’ll wait for that.”

It took a while, but Patty and I found we could get past blaming each other.
We had seen each other’s worst sides, but we were still together, and that
helped us to get closer. We started listening to each other. Patty began to
find her way in the work world, and I was learning that I didn’t have all
the answers. And we saw how our children were thriving. My three sons
transferred to schools in our neighborhood and made scores of friends.
Emily, Patty’s daughter, was a sparkling 10-year-old who loved her home and
her school as well as all her brothers. Even if we lost the house, we had
gained in other ways.

I called Chase back in January, when I was 90 days past due. Another
representative told me that I would automatically be evaluated for a loan
modification.

“You should just wait until you hear from one of our negotiators,” he told
me politely.

Another two months passed without anyone calling, so I tried again in late
March.

“I’m sorry, but our analysts have been backed up,” yet another Chase rep
told me, even more politely than the previous one. She said each analyst had
about 500 distressed borrowers to deal with, and it had been taking about
five weeks for customers to get a direct response. The delays seemed to be
getting longer.

I was actually beginning to feel sorry for Chase. It seemed to be so flooded
with defaulting borrowers that it didn’t have time to foreclose on my house.
Eight months after my last payment to the bank, I am still waiting for the
ax to fall.

Edmund L. Andrews is an economics reporter for The Times and the
author of “Busted: Life Inside the Great Mortgage Meltdown,” which will be
published next month by W.W. Norton and from which this article is adapted.