We know a young couple living in Las Vegas; let’s call them Bob and Carol Jones. They moved there about four years ago pursuing job opportunities provided by the rapid growth in the area. As with many young couples, they wanted to buy a home (or condo) and invest in their future together. They shared an interesting story with me, an anecdotal example of the problems plaguing the real estate market in many areas including Las Vegas. They said that they used Bank of America to finance their home purchase. And if you allow me to reminisce for just a moment, I might be able to draw some interesting “then and now” parallels. About 30 years ago, in the Boston area, my wife and I decided to purchase a home. We were renting an apartment at the time and thought it would be beneficial to invest in a home, thereby investing in our future. Sadly, that’s where the similarity with these stories seems to end.

Our local bank required that we put 20% down, did a thorough check of our finances, a complete job validation and review, interviewed us as prospective mortgagees, procured a comprehensive property appraisal (and strongly suggested we do one too), and charged an interest rate befitting both the time and our first time buyer status, a whopping 13% on a traditional 30 year mortgage. We were required to pay principal, mortgage insurance, interest and taxes for each payment, and had to go through extra hurdles to ensure we didn’t need a cosigner. It seemed very challenging for a young couple to buy a home, our first home was purchased for around $100,000; we were given much scrutiny before the local bank forked over the $80,000 for our mortgage. How did we get the $20,000 down payment? Even though we both worked full time, we lived on one paycheck and saved the other, banking it every two weeks for several years until we had sufficient funds for a down payment. We were young and just out of college, so the sacrifices didn’t seem overly significant at that time in our lives, they included things like used cars, inexpensive home cooked meals, limited vacations, and a refrain from restaurant dining.

Now let’s fast forward to the young Las Vegas couple, circa 2006. Why save for a down payment when Bank of America will approve your loan with nothing down, that’s right, according to Bob and Carol, they paid zip, zero, nada. And why eat macaroni and cheese when Bank of America will float you a 40 year mortgage, no worries for today, your property will increase in value, so why not dine out on a steak and lobster dinner? You can do whatever you want right now! How long have you been in your jobs? You’ve just arrived, been here only a few days? Actually your wife doesn’t have a job yet but you said she will have one prior to the close date? Just have her bring a letter from her new employer and we’ll accept that as proof of employment at the closing! And speaking of the closing, we’ll float you the $160,000 mortgage over 40 years for your one bedroom condo, don’t worry – be happy.

Perhaps you might think this story is an exaggeration. Sadly, our source is legitimate, and they swear this is a completely true story. Thirty years ago, I had job tenure of about two years, and the bank expressed serious concern about my modest employment record at the time. Our Las Vegas couple, first time buyers Bob and Carol, had barely arrived in Vegas, and Carol had only been there a few days when she put pen to paper for her condo. It was truly challenging for us to qualify for a mortgage, yet to us, it sounds like Bank of America was throwing money at Bob and Carol. So, what happened? We sold our house near Boston a couple of years later for a good profit, bought another home with a 15 year mortgage and paid it off. Bob and Carol’s condo value started dropping like a rock thrown over the Hoover Dam, immediately after closing, and they are now severely underwater (meaning they owe more than their house is worth). That’s right, their $160,000 condo would be lucky to fetch $70,000 on today’s market, a mere four years later. It could be a decade or two before they are above water. And because of all the speculation and fancy lending practices, some experts estimate that today, up to 80% of all Las Vegas homeowners are now underwater (particularly ironic since some say Lake Meade could dry up in the next fifteen years). Listen to these somber statements from a Las Vegas Sun article By Buck Wargo, Friday, Aug 7, 2009.

“Las Vegas is at greater risk than other cities that its homeowners will walk away from their mortgages even though they could afford them, according to a study by two Chicago universities.”

“The median price of homes sold in Las Vegas has fallen more than 50 percent since June 2006, and in its most recent study zillow.com said 67 percent of Las Vegas homeowners are underwater — when the amount owed exceeds the home’s current value — and more than 80 percent of the homes bought from 2005 to 2007 are underwater.”

Are Bob and Carol an unusual case? Are they merely a spurious statistic, an anomaly in the general lending landscape that happened in Las Vegas? Based on the foreclosure rates and negative property values, they would seem to be good example of what happened, not an exception to the rule. Shall we hold Bank of America solely responsible for this plight? Surely other banks were practicing similar practices, and buyers must accept responsibility too. But in this case, our story is simply about this particular loan to Bob and Carol from BOA. In hindsight, which party is most responsible here in the Bob, Carol and BOA mortgage debacle and how do we avoid making the same mistakes again? Certainly we all must take responsibility for our actions, after all, it is buyer beware. However, in my opinion, most of the blame, in fact almost all of the blame belongs to Bank of America. It is they who are the experienced institution of lending; it is they who have the resources, the knowledge, the background, and the experience in these matters. It is they who should be safeguarding their shareholder value by loaning responsibly and intelligently. They should know better than to be lending out huge mortgages with nothing down to young couples with a limited employment tenure (sounds like a TV infomercial doesn’t it). They are the ones who should be exercising restraint and fiscally responsible judgment, and subsequently I blame BOA for 99.9% of this issue and for requiring $45 Billion in TARP money (from me and you) to bail them out. Three decades ago, in a town north of Boston, it took us about four months to qualify for a mortgage. It took Bob and Carol a couple of weeks. I realize times change, but this hardly seems like a change for the better.

When I look through my rear view mirror, it seems that there was rampant speculation and a general lack of responsibility. It seems like giant financial institutions were playing fast and loose with shareholder money. There were costly bailouts and record foreclosures. And there are now many young, first time buyers, like Bob and Carol, thinking about walking away from an untenable situation, massive mortgages, properties too small to start a family, with property values so severely underwater that they have no hope of moving on with their lives. Bob and Carol, like many other property owners are considering a walk away, handing over their mortgage and dealing with the credit related or bankruptcy related fallout that would subsequently follow. In a way, this is not surprising, with nothing down and essentially no principal paid off (the first four years on a 40 year mortgage is almost zero principal) Bob and Carol effectively, if not pragmatically, became renters, and BOA became the owners, not a good formula for success. Perhaps a few suggestions are in order for both parties here:

Thoughts for Bob & Carol
• If it seems too good to be true – it probably is – even if the loan is coming from a seemingly reputable source
• Beware of cycles – particularly with real estate and the stock market
• Take your time and seek advice on large purchases

Thoughts for Bank of America
• Zero down mortgages to condo buyers who were employed a few days or months – is this smart lending?
• Forty year mortgages in a past peak (bubble) real estate market? Is that sound lending?
• 45 Billion in TARP funds needed because of your seemingly stupid and shoddy lending practices? And American tax payers have to bail you out because of the lending practices described above? You need to exercise more restraint and better judgment.

Lastly, a few suggestions for a new Bank of America (BOA) company name:
• Bankrupting of America (and the acronym still works) BOA
• Bank Un-American (shows how a company can embrace capitalism yet the results can still be un-American at the same time) BUA
• Bank of Dumb Lending in America (OK, it’s long, but it is accurate) BDLA

If any of you have similar stories – or simply a different perspective, please feel free to comment. For all of those who do not favor Wall Street/Banking regulations – please reread this article, particularly the part about Bob & Carol, arriving in Las Vegas a few days/weeks before being given a $160,000, zero payment down, 40 year mortgage, on a one bedroom condo, after the market had already peaked.