Sometimes you have to give awards to people retroactively. Case in point, Gordon Burger. Gordon is probably a good ole boy that got into house flipping with the real estate bubble in the early 2000s. Business Week featured him in an article back in the “good days” of 2006. No big concerns existed back then of a credit crunch. So what happened to good old Gordy? Gordon found out about interest only mortgages based on a flier advertising a low rate (mistake #1). Thinking this low rate would save him thousands in interest payments based on his own math (mistake #2), he signed up. Neglecting the fine print of what an option ARM is (mistake #3), Gordon quickly found the amount he owed was going UP each month.

Bonus Mistake: I know this guy lives in California, but what is a cop doing with a $500,000 home anyway?

Now he’s locked into a contract with thousands in prepayment penalties. It’s lose/lose for this guy as he can’t refinance or accelerate his payments (he can’t afford to anyway). Remember this was back in 2006. Given what has happened since September 2006, this guy is a prime candidate for foreclosure and bankruptcy now.

The article goes on to talk about the history of ARMs and even explains a bit about how banks make money off these loans. The trifecta of a great article from the past is: a great story that’s still relevant, an education component that’s still relevant, and bitter irony.

The irony is in the three following paragraphs (I bolded the important parts, but you must read the entire text to get the full effect):

Yet the banking system has insulated itself reasonably well from the thousands of personal catastrophes to come. For one thing, banks can sell some of their option ARMs off to Wall Street, where they’re packaged with other, better loans and re-sold in chunks to investors. Some $182 billion of the option ARMs written in 2004 and 2005 and an additional $83 billion this year have been sold, repackaged, rated by debt-rating agencies, and marketed to investors as mortgage-backed securities, says Bear, Stearns & Co. (BSC )Banks also sell an unknown amount of them directly to hedge funds and other big investors with appetites for risk.

Personal note to the above… HAHAHAHAHAHAHAHA!

The rest of the option ARMs remain on lenders’ books, where for now they’re generating huge phantom profits for some lenders. That’s because, according to generally accepted accounting principles, or GAAP, banks can count as revenue the highest amount of an option ARM payment — the so-called fully amortized amount — even when borrowers make only the minimum payment. In other words, banks can claim future revenue now, inflating earnings per share.

For many industries, so-called accrual accounting, which lets companies book sales when they contract for them rather than when they receive the cash, makes sense. The revenues will eventually come. But accrual accounting doesn’t apply well to option ARMs, since it’s more difficult to know if unpaid interest will ever cross a banker’s desk. “This is basically an IOU that may never get paid,” says Robert Lacoursiere, an analyst at Banc of America Securities. James Grant of Grant’s Interest Rate Observer recently wrote that negative-amortization accounting is “frankly a fraudulent gambit. But what it lacks in morality, it compensates for in ingenuity.” The Financial Accounting Standards Board, which is responsible for keeping GAAP up to date, stands by its standard but told Business Week in a written statement that it is “concerned that the disclosures associated with these types of loans [are] not providing enough transparency relative to their associated risks.”

Gordon gets the Weaky for his bad choice in loans and playing the role of pawn in this game of bad loans. I’m sure he knows better now.

An honorary award (not a Weaky) goes to Business Week and Mara Der Hovanesian, the author, for this great article that basically explains what will happen within the next 12 months from its publishing date. I contacted Mara to tell her how great this article was and to ask if she could give us an update on Gordon. Sadly, she has not been in contact with him but agrees with my point on how predicative this article was.

Read, Gordon’s part of the story starts with section called “The First Wave”.

Related posts:

1. Weaky Awards #2
2. Weaky Awards
3. Weaky Awards #1
4. Weaky #6: Wiggum or Cioffi?
5. Weaky #8: Seattle Edition

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