Author Topic: How a Financial Pro Lost His House  (Read 8683 times)

ET

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How a Financial Pro Lost His House
« on: February 24, 2012, 06:38:04 PM »
"How did I get here?

And how am I going to get out of this?

There are many stories these days of people who lost their financial bearings during the housing boom and the crisis that followed, but my story is a bit different from most.

I’m a financial adviser. I get paid to help people make smart financial choices, and I speak and write about personal finance issues for this publication and others. My first book comes out in January, “The Behavior Gap: Simple Ways to Stop Doing Dumb Things With Money” (Portfolio, a Penguin imprint)."

http://www.nytimes.com/2011/11/09/business/how-a-financial-pro-lost-his-house.html

arebelspy

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Re: How a Financial Pro Lost His House
« Reply #1 on: February 24, 2012, 07:22:14 PM »
About 3 and 1/2 months ago when this article came out, there was a big (4 page) discussion on the early retirement forums about it:

http://www.early-retirement.org/forums/f28/how-a-financial-pro-lost-his-house-58683.html

So that's a good place to start if you're interested in the article, and we can discuss here.

I agree with most of the people who think the author is just an idiot, and there's not really a lesson to be learned here besides "Don't be an idiot."

The second comment in the thread, written by W2R, sums it up perfectly, IMO.

To quote her (and the quotes within this are her quoting from the article itself):
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The guy's not the brightest bulb on the tree, IMO.
 
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We borrowed 100 percent of the purchase price. In fact, I was told I could borrow even more if I wanted. I had perfect credit and a solid income that was growing. But even so, when the lender approved us at 100 percent, it was more than I had expected. I remember thinking something like “Wow. I guess if they’re willing to lend it to us it must be O.K.”

This was in 2003 - - I bought my house in 2002 so I know what he is talking about. I could have borrowed more than I did if I wanted to be house poor and miserable. I can't imagine why anyone would subject their family to that in order to buy a half million dollar home in Vegas.
 
And then, when he refinanced the next year,
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We picked the lowest possible payment, the one that added to our balance each month instead of subtracting from it. And we added a line of credit with Wells Fargo.

Seriously, how could he possibly think this was a road to financial security, even if the housing market hadn't collapsed? Sheesh.
 
But then, 7 years prior he had been looking for a job as a security guard so I guess he wasn't accustomed to handling money.
 
To me, the lesson here is not to expect a financial advisor to know anything at all.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
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Mike Key

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Re: How a Financial Pro Lost His House
« Reply #2 on: February 24, 2012, 08:44:35 PM »
Anyone can be poor, but one most learn to be wealthy.

Grigory

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Re: How a Financial Pro Lost His House
« Reply #3 on: February 24, 2012, 10:54:38 PM »
He got blinded by greed and got what he deserved... To me, the scariest thing is that he works as an financial adviser, which means that unqualified idiot gave hundreds (thousands?) of people terrible (or at least very mediocre) financial advice. I can't even imagine the kind of advice he gave them. "Invest in gold because it'll never stop going up in price"? "Take out all your money from your retirement accounts and keep it in cash under your mattress"? O_o

MEJG

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Re: How a Financial Pro Lost His House
« Reply #4 on: February 25, 2012, 01:02:12 PM »
This is why I don't like financial advisors :-) 

I'll talk to family and friends about money (in the abstract) and we can agree or agree to disagree but in the end I (well Mr. MEJG and I) make the decisions about our money- no one else.

mmmsc

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Re: How a Financial Pro Lost His House
« Reply #5 on: February 25, 2012, 08:04:48 PM »
Lets see if I get the cliffs right

 Wannabe Security guard / Financial adviser
 Buys house in overheated market for zero down
 Refinances house to 150% of purchase price
 Moral dilemma (obligations vs keeping to normal operating procedure)
 Chooses normal operating procedure (leaves obligations for others to pay)
   

  (  ) Please buy my book I am much smarter now
  (  ) This is why you need a financial planner like me because I am much smarter now
  (  ) I am so lucky not to be a security guard because I am much smarter now
  (X) All of the above

arebelspy

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Re: How a Financial Pro Lost His House
« Reply #6 on: February 26, 2012, 07:36:20 AM »
Lets see if I get the cliffs right

hah, nailed it.   well played.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Reido

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Re: How a Financial Pro Lost His House
« Reply #7 on: February 26, 2012, 08:26:19 AM »
The best part of the story (if anyone read it) is that he SHOULD have HONKED - because the truck driver WAS paying his mortgage...

I'm more likely to buy a book about finance written by the truck driver than the author of that article!

Tim

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Re: How a Financial Pro Lost His House
« Reply #8 on: February 26, 2012, 09:46:59 AM »
The thing that speaks out to me about this article is the power of social influence. There were several parts in the article in which he talked about the people around them and figured if they could afford it, so could he.

It's tempting to call him a moron but social influence can exert quite the pull and hindsight is 20/20. The lesson I'm going to take from this article is:

Stay frosty; just because everyone is doing it... doesn't mean it's a good idea.


Reido

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Re: How a Financial Pro Lost His House
« Reply #9 on: February 26, 2012, 10:02:08 AM »
Tim, while I can certainly understand your point (and do feel a touch of sympathy for this gent), he does profess to be a financial advisor.  For someone in his position to deny the knowledge of the risks he was taking is just ludicrous.

I'd feel more sympathy someone who had no knowledge of the principles of real estate, or who had no investing experience and subsequently got caught up in the mass hysteria of a boom.

I can't imagine this guy is even a remotely competent advisor.

I think you're right about the take-home message!

As my grandmother used to say: "Just because everyone else is jumping off a bridge - should you do it too??"

LalsConstant

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Re: How a Financial Pro Lost His House
« Reply #10 on: February 27, 2012, 08:12:26 AM »
<shrug>

Circa 2005, I was over 40 grand in the hole with nothing to show for it whatsoever.  It took me a good many years to dig my way out of the hole and learn how to live sustainably.  Now I've got a positive net worth in the five digits and that's with spending 2.5 of the intervening years unemployed and most of the rest of that time at just above minimum wage.

That said I'm a stupid person and I'll cop to it.  Everyone else on the entire internet is so much smarter than I am they will never make mistakes in life and I will forever be the idiot who got himself in a bad position to these people.  Oh well, that's part of paying your stupid tax.

Now, I'd like to think if I wanted to pursue a career as a financial adviser (which I do not at the moment), I could use my experience to guide people who had mental/emotional/physcological profiles similar to mine out of such courses of action in ways they would understand.  I've been in an financial pinch, I know what you do to yourself to make it even worse. 

I know how you justify it.  I know the learned helplessness.  I know what it's like to cognitively understand what's a good rational decision, but be emotionally unable to act on it and wind up doing something stupid instead.  I know what it's like to envy people who have never had these problems, and to have the scorn of strangers.  And I have learned to worry about being the best person I can despite these problems and ignoring the rest.

I had to overcome all of it, and I'm not proud of that one bit.  Training yourself to listen to your brain is something I still haven't completely mastered but by gum I'm much better off than I was before, debt free for 3 years and counting.  And I'd dearly love to spare another human being that process, it is not fun.

Maybe this guy sees an opportunity to do that.  I'll leave the judging of him to people who are smarter than both of us.

mmmsc

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Re: How a Financial Pro Lost His House
« Reply #11 on: February 27, 2012, 07:02:17 PM »
LalsContant

I would not ridicule someone for a mistake. This man is a "professional" financial adviser. His actions are nothing short of negligence. If a ships captain knowingly steers his ship to close to shore and tears a hole in the hull that is negligence. Do you not wonder what kind of professional advice he was giving his clients? Perhaps the never ending string of phone calls are an answer.

Next he points out his moral dilemma, caused by his negligence, and decides his best course of action is to fall into a lifeboat. That is ok because others will clean up his mess.

Finally he tells the world (ok first post here) Ive written a book "How to stop doing dumb thinks with your ship (uhmm... money)"

Negligence Definition:"Negligence is the omission to do something which a reasonable man, guided upon those considerations which ordinarily regulate the conduct of human affairs, would do, or doing something which a prudent and reasonable man would not do, provided, of course, that the party whose conduct is in question is already in a situation that brings him under the duty of taking care."
   

I may or may not be smarter. I may or may not have made more or bigger mistakes. I have never been negligent in my profession.

James

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Re: How a Financial Pro Lost His House
« Reply #12 on: February 28, 2012, 10:14:01 AM »

I may or may not be smarter. I may or may not have made more or bigger mistakes. I have never been negligent in my profession.

I've got to agree with you.  I'm in the medical profession, and it's my job to follow ethical practices and keep the patient safe no matter what "the system" pushes at me.  It's part of being a professional, and he should be held to the standard of what he should have known and should have done, not the population at large.  I can sympathize that the system helped him, but in the end he still got what he deserved.

Early FI

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Re: How a Financial Pro Lost His House
« Reply #13 on: March 02, 2012, 01:05:47 PM »
TFB had an interesting post about this topic.  He gives the alternative view that the financial planner actually made some pretty good decisions and extracted cheap capital from the house.  You may not agree, but it's worth a read:

http://thefinancebuff.com/the-best-way-to-lose-your-home.html

mmmsc

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Re: How a Financial Pro Lost His House
« Reply #14 on: March 02, 2012, 05:57:50 PM »
Really? Take cash out of an asset you do not own with the intention of only paying it back if you make enough money. The author of this is right there is no downside, if you lack ethics.

Unethical or incompetent. I will leave it to you to decide which category this so called professional fits into (or maybe a bit of both).

Reido

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Re: How a Financial Pro Lost His House
« Reply #15 on: March 03, 2012, 03:51:43 PM »
I understand that he had a "bad" situation.  I understand that he made a mistake - I have done the same MANY times.  I feel for him - right up until he just completely gave up paying his mortgage.

This is unacceptable - his argument is that he has a "moral obligation" to his family...  by this logic I could go and rob a bank so that my family can buy a vacation home in Mexico - that's ok, right??  After all, it is for my family!!

He signed a contract.  I don't write the laws, but it is a very fitting end that he lost the house and his credit score.  Still, I think he should be paying the bank back for the lost revenue - IF he truly had the integrity to do so!!

Now, I don't expect him to do so, as that seems above and beyond the call of duty and I know few people who would do it...  but then again something like THAT would make for a book worth reading!!!

Guitarist

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Re: How a Financial Pro Lost His House
« Reply #16 on: March 03, 2012, 07:30:51 PM »
Yes, he signed a contract. You do know it says in there what happens when the contract is broken, right?
Don't feel sorry for the bank.

Reido

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Re: How a Financial Pro Lost His House
« Reply #17 on: March 03, 2012, 08:15:21 PM »
I don't feel sorry for the bank - just the tax payers who are now footing the bill...

Though I agree that this is a separate issue entirely.

Early FI

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Re: How a Financial Pro Lost His House
« Reply #18 on: March 04, 2012, 06:02:31 PM »
Really? Take cash out of an asset you do not own with the intention of only paying it back if you make enough money. The author of this is right there is no downside, if you lack ethics.

Unethical or incompetent. I will leave it to you to decide which category this so called professional fits into (or maybe a bit of both).

I'm not sure I see what's wrong with the bolded part.  If he was approved for the loan and didn't improperly use the funds, what's the problem?  The bank entered into the contract under their own free will.  He didn't coerce them into making that loan.  I'm a lawyer, so this might just be my lack of an ethical soul speaking here.

mmmsc

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Re: How a Financial Pro Lost His House
« Reply #19 on: March 04, 2012, 09:33:39 PM »
Quote from The Finance Buff

"The best way to profit from a bubble would be exactly as this planner did: maximize leverage for the upside and protect yourself from the downside. I’m not saying this planner planned this way but I don’t think he’s as foolish as people think. Given the options put in front of him, he made very good choices."

I understand the upside, but where is the downside protection? Simple, you walk away.

"When a bank offers 100% financing on a house you think will go up in value but you are never sure, putting 20% down would be foolish no matter which way the market goes.If the price goes up, you make more money with 100% financing because you have more leverage. If the price crashes, you lose your down payment if you put 20% down. Of course you should do 100% financing."

So why would putting 20% down be foolish? It would be foolish, unless you had no intention of paying the loan back if the house price tanked. Hint:"If the price crashes, you lose your down payment" uhmmm what about the promised loan repayment.

The bank entered this contract under the assumption that the loan would be repaid. Its not that the funds were used improperly but that one of the parties was going to knowingly default if his speculation did not work to his advantage.

I personally would never enter a contract I did not intend to fulfill my obligations. To me this is unethical.

Guitarist

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Re: How a Financial Pro Lost His House
« Reply #20 on: March 05, 2012, 12:05:45 PM »
I agree it's unethical, but if it comes down to providing a stable place to live and enough to eat for my family, then it isn't that easy.
Yes, taxpayers were hosed and that is the shame in all this, they were the only ones who really lost.
The banks should have been left to rot and die and our government officials should have been removed from office (the ones who promoted 0% down mortgages that is). But a contract is a contract is a contract. He broke it, the bank gets the house.

In my case, I never expect to end up in a contract where things are stretched that tight. I don't expect to ever face this dilemma.