Confession is good for a troubled conscious. Many people made huge fortunes duping ordinary families into transactions that ultimately cost them their good credit and their family homes. Last week I noted that Countrywide’s Mozilo Should Go to Jail.Now, a former Freddie Mac employee has come forward to confess that ruining lives was his job, and he was better at it than he would have liked to be.
by Chana Joffe-Walt and Adam Davidson -- October 22, 2010
Fannie Mae and Freddie Mac have worked for decades to help more Americans become homeowners. Now one former Freddie Mac employee has asked us for the opportunity to apologize for doing such a good job of fulfilling that mission.
Jacob Kosoff used to work as an economist for Freddie Mac's "Mission Department." His job was to look at the loan data each month and promote homeownership. He says his team was full of true believers who called themselves "housers."
This guy was a missionary for the cult of kool aid.
"I thought subprime was the best thing in the world," he says.
It was not until the spring of 2008, just months before Freddie would be bailed out by the federal government, that Kosoff began to question his fundamental belief that owning a home was better than renting.
He mentioned his concerns in the office.
"It was a bit like announcing there was no God — like the idea that housing was like God," he says. "Buying is always better. Listen to your mom, listen to your minister, listen to the government, listen to politicians. Everyone says it's better."
This shows how deeply embedded kool aid has become in our society.
There's one thing in particular that Kosoff would like to apologize for.
While at Freddie Mac, Kosoff managed an online calculator designed to help people determine whether to rent or buy a house. In fact, it's still online — you can see it here.
You plug in the cost of rent, cost of renters insurance, and the price of an equivalent home. Then it asks you to punch in an estimated appreciation rate for the home — how much you think the home's price will change over time. But if you plug in a negative number — if you estimate that the home will lose value — the calculator gives you an error message:
Freddie Mac
"I'm sorry that I didn't send an e-mail or work a little harder to get that fixed so the calculator can allow for the possibility of reality," Kosoff says — the reality that housing prices sometimes decline.
Kosoff wonders if some people used the calculator to come to a very bad decision: to buy an overpriced house with a subprime mortgage when they should have rented instead.
Or course people bought based on the results of this calculator. That was the whole point. All the online rent versus buy calculators -- with the exception of ours -- are designed to ignore costs and exaggerate benefits in order to induce people to buy. These calculators are generally sponsored by some person or entity whose livelihood depends on coercing people to buy.
Freddie Mac says it plans to fix the calculator to allow for the possibility that housing prices do not always go up — a reality we are all living through right now.
Many people have asked me why I don't put in the ability to project forward for inflation of costs and appreciation. There are several related reasons, but the primary among them is that any projection of the future will invariably exaggerate the benefit of ownership. Nearly all prospective buyers and existing homeowners think house prices go up faster than they do. House prices usually track wage growth (about 3%), but most people believe house prices go up two or three times that fast. Many accept that California house prices go up 6% to 10% a year as a truism. It's not.
Steady side income
Orange County is a hotbed for entrepreneurs. Many people either make their living or supplement their living from entrepreneurial activities. Nearly every homeowner in California -- or at least all the ones who have been selling their homes over the last 4 years -- have been living like entrepreneurs with a steady side income. When people make $80,000 a year and their house provides $40,000 a year, they get to live the OC lifestyle. People from the outside don't get out house prices until they see how paying those prices enables Californian's to live.
Today's featured property was purchased on 5/29/1998 for $199,500 according to my records. I think this number is in error because there is a $202,950 first mortgage on the property. In all likelihood, that was an FHA loan, and the real purchase price was $210,000.
On 4/21/1999 they obtained a stand-alone second for $11,631.
On 9/17/2001 they refinanced the first mortgage for $229,800.
On 12/3/2001 they got a $45,000 HELOC.
On 7/9/2003 they refinanced the first mortgage for $271,000
On 12/9/2003 they refinanced with a $305,000 first mortgage.
On 6/18/2004 they opened a HELOC for $122,000.
On 7/20/2006 they opened a HELOC for $100,000.
On 9/28/2006 they opened a HELOC for $52,882.
On 9/28/2006 they opened a HELOC for $47,118. Notice the simultaneous HELOCs. That is mortgage fraud.
On 2/20/2008 they refinanced the first mortgage for $400,000.
On 7/3/2008 they refinanced again for $399,400.
On 12/5/2008 they refinanced with a $398,500 first mortgage. I have to wonder if someone in the family is a mortgage broker.
On 4/23/2009 they refinanced with a $410,000 first mortgage.
That is 13 refinances or HELOCs in a 10 year period.
Total mortgage equity withdrawal is $207,050.
What amazes me about this behavior is that banks continued to support it as late as April of 2009. Isn't it obvious that this borrower has gone Ponzi? I suppose lenders love customers like this as they generate huge fees, but this behavior is exactly what caused banks to loan out too much money to the wrong people during the housing bubble. Apparently, lenders haven't learned anything from that experience.
Home Purchase Price … $192,000 Home Purchase Date .... 6/17/1988
Net Gain (Loss) .......... $296,706 Percent Change .......... 154.5% Annual Appreciation … 4.4%
Cost of Ownership ------------------------------------------------- $519,900 .......... Asking Price $103,980 .......... 20% Down Conventional 4.23% ............... Mortgage Interest Rate $415,920 .......... 30-Year Mortgage $98,415 .......... Income Requirement
$2,041 .......... Monthly Mortgage Payment
$451 .......... Property Tax $0 .......... Special Taxes and Levies (Mello Roos) $43 .......... Homeowners Insurance $285 .......... Homeowners Association Fees ============================================ $2,820 .......... Monthly Cash Outlays
-$335 .......... Tax Savings (% of Interest and Property Tax) -$575 .......... Equity Hidden in Payment $158 .......... Lost Income to Down Payment (net of taxes) $65 .......... Maintenance and Replacement Reserves ============================================ $2,132 .......... Monthly Cost of Ownership
Cash Acquisition Demands ------------------------------------------------------------------------------ $5,199 .......... Furnishing and Move In @1% $5,199 .......... Closing Costs @1% $4,159 ............ Interest Points @1% of Loan $103,980 .......... Down Payment ============================================ $118,537 .......... Total Cash Costs $32,600 ............ Emergency Cash Reserves ============================================ $151,137 .......... Total Savings Needed
Property Details for 4 TONADA Dr Irvine, CA 92620 ------------------------------------------------------------------------------ Beds: 3 Baths: 2 full 1 part baths Home size: 1,800 sq ft ($289 / sq ft) Lot Size: 1,891 sq ft Year Built: 1977 Days on Market: 93 Listing Updated: 40459 MLS Number: S626236 Property Type: Single Family, Residential Community: Northwood Tract: Sd ------------------------------------------------------------------------------ ** REDUCED $20,000 ** you are looking to live in Northwood, this is a must see! Large living room with fireplace, Huge dining area, Family room, Wood flooring, New carpeting, Open kitchen, Large secondary bedrooms, Fireplace in master bedroom, Newer double paned windows & Oversized two car garage.
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