About the Movie
The Big Short is a 2015 film based on Michael Lewis’ book of the same name. Directed by Adam McKay of Anchorman fame, it’s a true story about a handful of investors who bet against the U.S. mortgage industry prior to the 2008 housing market collapse.
In a nutshell, Scion Capital Hedge Fund Manager Michael Burry began analyzing mortgage bonds in 2005. A mortgage bond is basically a bundle of mortgages. In the movie, it’s visualized as a Jenga® game. The Jenga® tower is the bond while the Jenga® pieces are the individual mortgages that make up the bond.
Burry discovered a majority of the mortgages that were making up these bonds consisted of subprime mortgages (mortgages given to people who may have difficulty paying them back due to unemployment, divorce, medical emergencies, etc.).
In addition, many of these mortgages had adjustable rates that were set to skyrocket in 2007, meaning the monthly payments would be almost impossible to pay. When mortgages go unpaid within a bond, the whole bond fails and becomes worthless. (Imagine the Jenga® pieces pulled out one by one until the tower falls.)
Once Burry discovered this, he aimed to “short” the market by taking out insurance on the bonds. To him, it was like “taking out fire insurance on a burning house.” Others didn’t see it that way because mortgage bonds had never failed in the history of America. They laughed at him, but he didn’t care, because he knew he had the upper hand.
The story itself is fascinating, but McKay’s interpretation is beyond impressive. The script takes a severely dense topic and breaks it down to explain the 2008 housing crisis in an easy-to-understand way. Beyond the Jenga® example, the writers brilliantly explain mortgage terms through sidebars: one shows late chef Anthony Bourdain comparing Collateralized Debt Obligation to bad fish; another has actress Margot Robbie in a bubble bath explaining how mortgage bonds morphed from a legitimate banking opportunity to an illegal monstrosity. It’s no surprise the film won an Academy Award® for Best Adapted Screenplay.
The Big Short makes it devastatingly clear that corruption is to blame for the 2008 collapse. But there’s also a valuable lesson to be learned. BE INFORMED. Many of the Americans who signed bad mortgages in the early 2000s were maliciously led to believe they could afford them, but at the end of the day, they signed, so they had to agree to the terms of the loans.
My First Home Buying Experience
Interestingly enough, I purchased a condo in January 2008. I had no idea what I was doing. I worked with a “friend of a friend” who was a “mortgage guy”. He hooked me up with a balloon mortgage, which is a mortgage that offers low, fixed rates for the first three years, at which point the mortgage balance needs to be paid in full. Borrowers with balloon mortgages usually sell before the balance is due or refinance the loan. I had no intention of doing either, so I felt blindsided at the closing sale of my home.
I told my “mortgage guy” I would not be able to pay the mortgage off in full at the end of the three years when the adjustable rate ended. He said not to worry because I would refinance before then. I knew I didn’t want to do that, but I signed the loan documents anyway. Why? Because I was so excited to buy my first home. I figured the rest would work itself out. Then, for reasons out of my control, I was not able to refinance until five years later. Luckily, the bank allowed me to renew my balloon mortgage at a temporary fixed rate until I was able to refinance so I didn’t default on my loan. As The Big Short reveals, many Americans were not this lucky.
So, how did I get to the closing sale of my home without knowing what I was getting myself into? It’s simple: I was uninformed. Unfortunately, it happens all the time. The more you know, the better off you will be.
What You Should Know
The Difference Between a Fixed-Rate Mortgage and an Adjustable-Rate Mortgage
- A fixed-rate mortgage is paid over a set amount of time at a specific interest rate. Market rates may rise and fall, but your interest rate won’t budge.
- An adjustable-rate mortgage (ARM) offers a low introductory interest rate that’s “fixed” for a few years. After the “fixed rate period” your payments will most likely go up. If you decide to go with an ARM, count on refinancing or verify with your mortgage loan officer that your payment will remain affordable.
Know What You Can Afford
- Connexus Mortgage Loan Officers can compare your income to your debt to make sure the property you buy is affordable for years to come.
Know Everything That Goes Into Your Monthly Payment
- Beyond the monthly cost of your home, your monthly mortgage payment includes property taxes, home insurance, PMI (if you don’t put at least 20% down), and possibly Homeowner Association dues. If these things aren’t factored into your monthly payment, you will have to pay them separately.
Know All Costs and Fees Involved
- You will need a down payment. A large down payment helps lower your monthly payment, but it’s not a requirement. At Connexus, we offer low down payment options. Contact a Connexus Mortgage Loan Officer for details.
- Closing costs are the fees associated with the sale of a home that are paid at the closing sale of the home. This may include title insurance, lender fees, appraisal fees, and more. Closing costs are typically in the thousands.
- Loans can include fees for processing documents, checking credit history, inspecting the property, and more. Loan fees could be minimal in cost or they could be more. Ask your mortgage loan officer what to expect.
So, if lesson #1 is to be informed, lesson #2 is to find a good, thorough mortgage loan officer. They’ll verify income, assets, and down payment sources before issuing you a loan. They’ll also set up your home inspection, help you read the inspection report, and adjust your offer if major issues are found. Be prepared to provide tax returns, bank statements, proof of employment, information on debts, and more. If your mortgage loan officer doesn’t require these things, ask them why. Although it’s tedious, they’re doing this for your benefit to ensure you can afford your mortgage for years to come. If they cut corners, you could be the one paying for it in the future.
At Connexus, we have a great team of mortgage loan officers who make your needs their top priority. Contact us today or visit our Mortgage Loans page for more about our mortgage offerings!
* Please note: The Big Short is Rated R for pervasive language and some sexuality/nudity.