The innocent borrower

By: PAUL JACKSON
October 27, 2008 12:43 PM CST

Time and time again, we’ve seen the so-called “innocent borrower” — the borrower who had NO IDEA that their adjustable rate mortgage could adjust, had no idea that a 1.5 percent interest rate wasn’t what they’d be paying for 30 years, had no idea that their home could lose so much in value. Such borrowers are regularly trotted out for us to see, as proof of the need we have to put a stop to the foreclosures.

The latest example is one Luis Flores, per Bloomberg. Here’s the lede:

For almost a year, Luis Flores has been lobbying mortgage lender IndyMac Federal Bank FSB to cut his house payments. They have doubled since he refinanced his home loan in 2005 and he can’t afford them, Flores says.

“Every time I call them they say they can’t help,”said Flores, 31, a graphic designer and bartender in Contra Costa County, California, where one in every 146 homes is in foreclosure. “They tell you the solution is that they take Visa or MasterCard.”

Now Flores has a new ally: the Antioch, California-based Contra Costa Interfaith Supporting Community Organization, one of a growing number of religious and community groups pushing lenders to renegotiate troubled loans so owners can stay in their homes.

And why won’t big, bad IndyMac — even the IndyMac now run by the FDIC — help? Those pesky details are relegated to later in the story, lest they ruin a great opening about the plight of the borrower:

Flores refinanced his mortgage through IndyMac, the Pasadena, California-based company that was seized by the FDIC in July. Two months after his loan was issued near the end of 2005, it adjusted from 1.5 percent interest to about 9 percent, Flores said. That lifted his monthly payment to $3,700 from $1,700 and covered only the interest. He said his home is worth $255,000 today and he owes about $480,000.

“I want a payment that I can afford, and I want to feel like I’m making payments toward the house,” said Flores. He’s told the bank in e-mails and phone calls that he can pay $2,300 to $2,500 a month, he said.

So the dude took out a $480,000 interest-only loan with a two-month teaser at 1.5 percent at the end of 2005 — on a refinancing effort. His timing was clearly as horrible as they come. While we don’t know the details of his refinancing, I’d hazard a guess he wanted to pull some of that cash out of his home ATM. Maybe he got a nice new truck. Or a waterski.

And while we can bicker about how a guy who moonlights as a bartender was likely qualified at the teaser rate — which he never should have been — he’s now in a situation where he has been performing on his note for roughly two years or longer.

Yet he really only began complaining about his note one year ago, per the start of the story — which means he spent the better part of a year performing as agreed. We don’t hear in the story that he’s lost a job or that his own financial situation has somehow changed, only that he’s spent a year calling his servicer while continuing to perform on the note. The real kicker here, of course, is that he’s seen his property value fall from $480,000 to $255,000 — and he can’t refinance his way out of a paper bag at this point.

Flores now wants the bank to take the $225,000 hit on his loan, while he gets to stay in the home. It’s ironic, don’t you think, that we have to hear people complain about how only Wall Street wants to socialize losses?