Business week published a story over the weekend: House price: $3,500. Mortgage $228,000. It's a story about a senior couple living in North Minneapolis who purchased their home in 1977 for $3,500 and it's now worth $174,000. The problem? They owe $228,000 on it. You have to scratch your head and wonder how in the hell this happens to people. There are a *LOT* of people involved in *ANY* real estate transaction, even if it's just a refinance. The appraiser, title closer, mortgage officer, underwriter, and processesor just to name a few. A number of things had to go wrong for this couple:
- According to the article this couple paid $4000 for an appraisal. In Minnesota an appraisal costs between $300-$400.
- The appraiser had to appraise the house at $228,000 for the lender to approve the loan.
- When banks were approached with refinance applications a few years ago, it wasn't a big deal if appraisals were a little "off". Appreciation was rising so rapidly that a few months appreciation of a home would make up for a slightly inflated appraisal. Today, it would take a year or two for a home to appreciate enough to make up for a 3-5% difference in actual value to the appraised value.
- The law provides for consumers to receive a good faith estimate (GFE) on any new mortgage. The GFE discloses all of the fees related to closing the loan as well as the new monthly payment.
- Have you ever tried to read a GFE? Unless you work in accounting, if someone doesn't actually explain it to you, it's like trying to decipher a foreign language.
- The borrower has to sign the GFE. We as a consumer sign things all the time without asking enough questions-our older generation is no exception.
- The couple also had to disclose their income. Instead of signing a disclosure statement that said they had an $800 monthly income, they signed a legal document stating they had a $6000 monthly income.
- Someone at the lender had to have the couple's bank statements and generate that document that said they had $6000 monthly income.
Who's to blame? Would you say "Shame on the predatory professionals?" or would you say "Caveat emptor?" I could make a case for both the professionals and the consumers.
Frankly, what matters is there are consumers all over the country that this has happened to, and there isn't really any course of action for them. At least, nothing that will remedy their situation fast enough to ease the financial burden enough to help them comfortably stay in their home. Place blame where you will. It's tragic.
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