links for 2009-05-22
Cheney vs. the Asteroid

Ed Andrews, Patty Barreiro, and Serial Bankruptcy: Megan McArdle: Smart Young Blogger or All-Knowing Being?

Felix Salmon says: McMegan FTW!!!!

Megan McArdle reports from the Montgomery County Courthouse:

The Road to Bankruptcy: At the end of his book's harrowing account of mortgage mistakes and credit card crises,  Edmund Andrews writes:  "While our misadventure had certainly been more extreme than those of many other Americans, our situation was not all that unusual."  And indeed the book reads like the story of an American Everyman, easily sucked in to the alluring world of easy credit as he struggled to blend a new family.  The terrifying implication is that it could happen to you--to anyone who leads with their heart and not their head. But... the story has been tidied up a little. Patty Barreiro, Andrews' wife, has declared bankruptcy twice.  The second time was while they were married, a detail that didn't make it into either the book or the excerpt....

Andrews' desire to shield his wife is understandable--hell, laudable.  No decent person wants to parade their spouse's financial trouble in front of the world.  But this is material information that changes the tenor of his story. Serial bankruptcy... doesn't just happen to anyone, particularly anyone with a six figure salary. In September 1998, California bankruptcy court records indicate that Patty and her first husband declared bankruptcy... family income of $174,000 in 1996, $87,000 in 1997, and $126,000 in the first nine months of 1998... the couple owed about $30,000 on 8 credit cards, over $200,000 in back taxes, and almost $15,000 in private school tuition, as well as substantial car and mortgage payments. In 2007, nearly as soon as she was eligible, Patty Barreiro filed again in Montgomery Country. When called for comment yesterday, Andrews was unavailable.... The bankruptcy code requires filers to wait 8 years after a previous Chapter 7 discharge.  Barely four months after she became eligible, Patty Barreiro filed again.  And the filing shows some suggestion of strategic debt management. Ms. Barreiro filed separately from Andrews, and had to amend the filing to include Andrews' income after a complaint from a creditor.... She filed when her income was at rock bottom, consisting only of unemployment; the timing may have just excluded having to declare $5,000 in freelance editing income Andrews mentions in the book. And she shed what appear to be jointly incurred debts, such as a Comcast account....

Serial bankruptcies can, of course, happen to anyone with enough bad luck.  But they usually don't.  And when they do, they usually hit people with marginal incomes that leave no margin for error in the budget.  Most people, even in LA, are able to build a sustainable budget out of an income in the low six figures. Moreover, pesky bad luck isn't really the picture painted by either filing.  Rather, Ms. Barreiro seems to have spent most of the last two decades living right up to the edge of her income, and beyond, and then massively defaulting. If you structure your finances so that absolutely everything has to go right, it's hard to blame the mortgage company when you don't quite make it.

Andrews has been admirably open about many of the poor decisions and the wishful thinking that led him deep into debt.  Nonetheless, he has laid much of the blame onto irresponsible bankers and mortgage brokers. The missing bankruptcies substantially undermine this basic narrative arc of Andrews' story.  Particularly in his book, the bankers are the villains, America's current troubles are the inevitable denouement of their maniacal greed, and the Andrews household stands in for an American public led, by their own greed and longing and hopeful trust, into the money pit....

[I]t's still true that she and Andrews were able to dig themselves in a lot deeper because of fantastically easy credit from a variety of fantastically stupid bankers, most of whom now seem to have gone fantastically bankrupt. But while the willing lenders amplified the problem, given Ms. Barreiro's history, it seems unlikely they were at the root of it. It's hard to see them as victims either of those bankers, or a mass mania. Andrews married a woman with a lengthy history of debt and spending problems.  Serial bankrupts were getting into trouble long before there was a credit bubble, indeed long before there were credit cards or 30-year self-amortizing mortgages...

I disagree with Megan. If a road leads to the edge of a precipice and someone falls off, it is not terribly constructive to say: "Well! They were unsteady on their feet!" Instead, you build a guardrail. We are jumped-up East African Plains Apes whose key cognitive talents are figuring out which food is ripe, determining whether it is safe to leap to the next branch, keeping track of who is sleeping with whom so we don't proposition the wrong person and get beaten up, and guarding our children from violent death--we don't have the smarts to avoid serial bankruptcy. Which is why we should nudge ourselves into social systems in which serial bankruptcy is a very difficult thing to accomplish.

The financial companies of America bet that Patty Berreiro's financial judgment was so bad that they could extract enough in sky-high interest from her on her debts before she went bankrupt to make it a winning proposition to them although not to her. People whose business model rests on subtracting value from their customers need to be regulated out of existence.

And, of course, there are the shareholders who did not guard their own interests as well because they too were jumped-up East African Plains Apes. You can hear a certain glee in Ed Andrews' observation that two of his three mortgage lenders are now bankrupt.


Laura Rowley:

Yahoo! Personal Finance: Calculators,Money Advice,Guides,& More: In a 'New York Times' story headlined “My Personal Credit Crisis”, economics reporter Edmund Andrews, 48, lays bare his finances and admits to a headlong dive into the subprime debacle. In the piece, excerpted from a forthcoming book, he describes buying a home he couldn’t afford with his second wife, Patty, falling ever deeper in debt, and cashing out his equity to finance a lifestyle that cost $3,000 a month more than they were earning. It ends with Andrews defaulting on the mortgage and, eight months later, still waiting for the bank to begin foreclosure proceedings.

Andrews’ story is riddled with classic personal-finance errors thought to be the province of the uneducated, underemployed, and ill-fated. Andrews was none of these; he earned $120,000 a year and didn’t suffer a disability or job loss. He explains his folly this way: "The money was there, and I was in love…I just thought I could beat the odds." But -- at least in hindsight -- the colossal improbability of beating the odds leaps off the written page. This is magical thinking at its finest, from a guy whose job is to write about the facts all day long. Multiplied by tens of millions of homeowners, it brought the U.S. economy to its knees.

Here are just a few lessons from his story:

  1. Price your passions. Andrews divorced his first wife after 21 years of marriage and was responsible for $4,000 a month in alimony and child-support payments. This left him with $2,777 a month in take-home pay to support his new wife and her children.... [P]eople who stayed married accumulated 93 percent more wealth than single or divorced people.... In the book 'Spend ‘Til the End', authors Lawrence Kotlikoff and Scott Burns urge readers to “price their passions”...

  2. Budget for the worst-case scenario. After the $2,500 mortgage payment, Andrews had $277 a month left for necessities, and hoped that Patty’s salary would make up the difference: “I was banking on Patty to earn enough money to keep us afloat.” Five months after moving into their home, Andrews was shocked to find just $196 left in his checking account. He writes, “How could I have glossed over the fact that we were spending about $3,000 more than we were earning, month after month?”...

  3. Avoid the two-income trap. Counting on a second salary to make ends meet in the first place was an enormous gamble. Andrews writes, “Patty had spent much of the previous two decades as a stay-at-home mother in Los Angeles. Her last full-time job as an editor at a political research company was back in the early 1980s”...

  4. Know what you can afford. A mortgage, property taxes, and insurance should total no more than 29 percent of gross income -- and those expenses, plus other long-term debts, should be no more than 36 percent of gross income...

  5. Call your bank and ask them to cut you off in the event you attempt a debit or ATM transaction and the account has insufficient funds. As Andrews’ finances spiraled out of control, he repeatedly overshot his checking account. “Every time I overdrew my checking account by even a few dollars, the bank would tap my Mastercard for $100, helpfully deposit the cash in my account, and charge me $10 for the privilege,” Andrew writes. He recounts a $5 overdraft for school supplies. Assuming he deposited money two weeks later to repay the overdraft, his annual APR on the $10 overdraft “loan” would be 5,200 percent. (Here’s the calculator.)

  6. Have a serious conversation about money with your intended before you tie the knot...

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