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TMFBro (< 20)

When bad spending habits and ugly mortgages collide

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July 20, 2009 – Comments (6)

You may be familiar with the plight of New York Times economics journalist Edmund Andrews, who has chronicled his financial downfall in an article and new book (I first blogged about it here). He and his new wife, Patty, despite a six-figure income, found themsleves with credit-card bills of $50,000 and an "ugly" subprime mortgage. How dd they do it? As Andrews wrote: 

"Between humongous loan balances and high rates, we had hung ourselves with the rope they gave us. In the previous December alone, we charged $2,845 on the Chase card for Christmas gifts, food, gasoline, clothing and other expenses. The charges included almost $350 for groceries, $700 in clothes from J. Crew, $179 at GapKids and $700 for airplane tickets for two of Patty’s children to visit their father in Los Angeles. Our balance climbed from $14,118 to $17,135, and in January 2006 we maxed out at our $19,000 credit limit. And there were other expenses on other cards: $1,200 in dental work for Patty’s son Ben; $1,600 to rent a beach house the previous year for us and all the children. Granted, the beach house was an embarrassing mistake. But given that Patty had landed a solid job, it seemed like an indulgence we could work off later."

And then there was the ugly mortgage. 

This may be old news to some of you who have been following this story, but Megan McArdle at The Atlantic uncovered a fact Andrews didn't reveal in his article or book: His wife has twice declared bankruptcy: 

"In September 1998, California bankruptcy court records indicate that Patty and her first husband declared bankruptcy.  The financial statement they filed with the court indicated family income of $174,000 in 1996, $87,000 in 1997, and $126,000 in the first nine months of 1998.  The income fluctuations are not surprising, given that her husband was in the film production industry.  By the time of the filing, 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, but there is no question that it is his wife:  his income and occupation are prominently featured in the docket.

"This is really highly unusual.  For starters, the overwhelming majority of people who file bankruptcy do not make anything close to $100,000 a year--the standard estimate when the 2005 bankruptcy reform was passed was that about 80% of filers had household incomes below the median income in their state.  The number of affluent people who file twice is even smaller, and has presumably gone down since the 2005 filing largely eliminated abusive serial Chapter 13 filings, which used to be used, often by quite wealthy people, to forestall evictions or foreclosure." 

It was clear from Andrews' article that these folks had "spending issues," but McArdle's nugget shows how bad it really is. As she wrote: "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."

Truer works were never written about financial planning.

6 Comments – Post Your Own

#1) On July 20, 2009 at 2:38 PM, TMFBro (< 20) wrote:

Man, my links just don't stick. Anyway, my original blog post on this topic:

http://caps.fool.com/Blogs/ViewPost.aspx?bpid=196076&t=01005037795772426156

And McArdle's article: 

http://meganmcardle.theatlantic.com/archives/2009/05/the_road_to_bankruptcy.php

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#2) On July 20, 2009 at 3:36 PM, Imperial1964 (97.93) wrote:

I won't blame the lenders, but did they actually expect to get their money back?

If a reporter can gather such publicly available information why don't lenders?  If Ms. Barreiro had decent credit score something is wrong with FICO and if she didn't why did they loan the money without investigating further?

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#3) On July 20, 2009 at 3:49 PM, exempligratia (< 20) wrote:

Andrews, who fashions himself as the “poster child” for the mortgage crisis, tries to make it sound as if people are vilifying him for taking out a bad mortgage; therefore, if you criticize him, you’re criticizing millions of other people. This allows him to heroically come forward to defend those millions of people.

It’s a neat little argument, but completely false and disingenuous. Millions of people did not write a tell-all memoir about their finances, conveniently leaving out the fact that they had a money-sucking monster in their closet. His is a problem of journalistic ethics, not of material excess.

An overview on the debacle: http://edmundandrewsaffair.blogspot.com/

If the above link doesn’t show: edmundandrewsaffair.blogspot.com

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#4) On July 20, 2009 at 4:23 PM, lemoneater (79.38) wrote:

I would not have been able to sleep at night running up a debt that high for discretionary items. But evidently some people have a distorted financial reality.

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#5) On July 20, 2009 at 4:50 PM, TMFBro (< 20) wrote:

Thanks to exempligratia, I've found an explanation Andrews provided for his wife's bankruptcies:

http://www.pbs.org/newshour/businessdesk/2009/05/ed-andrews-responds-to-critici.html

I will say that I know two women who have had a similar experience as Ms. Barreiro's in that they were "blindsided" by the financial incompetencies of their husbands (not filing taxes, not paying bills, businesses failing but the husband not saying a word).

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#6) On July 20, 2009 at 6:33 PM, exempligratia (< 20) wrote:

Yeah, you can kinda, sorta, maybe use that excuse once. It’s a bit dicey to employ the “Ruth Madoff” defense these days — claiming innocence by using a negative stereotype of women as traditionally being passive and ignorant of finances in a relationship. The fact is, the vast majority of women do know a thing or two about the way money works. And when you start to peel back the layers on Barreiro’s actions — the back-to-back bankruptcies, the lawsuits, three people who got financially involved with her going into the hole, etc. — it suggests something else: her bankruptcies may have been strategic, regardless of the lame excuses (deadbeat ex-husband, mean sister, etc.) Andrews employs.

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