A Tale of Two Mortgages

This is a tale of two mortgages or rather, two middle-aged men.

Let’s start with Carlos.

Carlos is a naturalized citizen of the United States who emigrated from Columbia. Well-educated, Carlos was a mid-level executive for a large company in his home country. With pride, he says that he once had excellent skills in business administration.

Carlos never duplicated his early career success in this country. For many years, he has earned a living driving for a local car service/limousine company. I have known him for at least a decade and have enjoyed our discussions during trips to airports and meetings in the city.

Without exception, Carlos dresses in a suit, crisp white shirt and tie. He is courteous, yet formally respectful to his clients. He arrives early and will do what it takes to make his clients feel comfortable -- and more important than they probably are.

Carlos divorced many years ago, then remarried and started a second family. Eager to provide for his wife and young son, he saved and searched to find a home for them. In his best years, Carlos never makes more than $60,000.

Unable to afford the sky-high housing prices in the New York area, Carlos took a big gamble and relocated his family to South Carolina. With a huge smile, he showed me photographs of the first Christmas in his new house.

Unfortunately, Carlos could not find work in South Carolina and ended up back in New Jersey driving for the car service. He settled into a routine of living with his oldest son, sending money to his wife and visiting for short stays every few months or so.

Like many families who struggled to find an affordable house, Carlos would not have been able to buy a home if it were not for the sub prime mortgage market. Now like many of those same families, Carlos is likely to lose his house – if not for economic reasons, then for the difficulties of a long distance marriage. The situation does not look good regardless of his deep-seated optimism.

Now, let’s turn to John. An established and successful sales executive, John rode the first tech boom and earned ample bonuses and stock options along the way. Having put his kids through college and paid off the mortgage on his home in Westchester County, he sold options and bought a vacation dream house along the Gulf Coast of Florida.

John watched the Florida real estate market take off, and heard plenty of stories of big financial gains from buying and flipping condos. Eager to profit, John decided to get into the act himself. While he never considered himself a speculator, he quickly acquired 2 additional condos and a single-family home – and carried almost $1 million in mortgages.

In the spring of 2007, John was let go – the latest victim of corporate restructuring. Now 55 and finding it difficult to find a job and replace the $300,000 he earned before, John is beginning to panic. The interest rates on his Florida mortgages are rising. John’s wife Susan sells real estate mostly to keep busy and cannot make up for the lost income on her own.

It is unlikely that John will make it through the mortgage crisis with his assets in tack. The values of his homes in Florida are now below the face value of his mortgages. John will likely sell all of his real estate to clean his slate of debts. While John will never be impoverished, this will be a set back he will likely never recover from. They are still too young to rationalize the sale of their Westchester home as the downsizing of empty nesters. For the first time in many years, John’s relationship with Mary is strained.

Perhaps you feel less sorry for John than Carlos. The speculators deserve to feel the pain on the downside, if they are going to make quick profits on the upside. And who can blame Carlos for taking bold steps to provide a nice home for his wife and young son.

Yet, John is inherently a good man too. He – and his friends -- viewed capital gains as an entitlement. He had worked hard and long hours to be in a position to invest in real estate on the side.

Both tried to provide for their families. Both failed. Should the government step in and help Carlos? John? Both or neither? Let me know what you think.