Why are mortgages so complicated? In principle, it is just a long term loan used to buy real estate. Yet, mortgage products have become so complex that no one understands them anymore.
A recent study by the Federal Trade Commission confirmed some of difficulties that people have in deciphering today's mortgage products. The commission surveyed 819 recent prime and subprime mortgage customers in 12 locations around the country. The findings of the study were disturbing:
· Nearly nine out of 10 borrowers could not identify the correct amount of upfront charges connected with a loan.
· Four out of five could not explain why the stated interest rate on the loan note was different from the annual percentage rate, or APR, highlighted in the truth-in-lending disclosure.
· Two-thirds did not identify a potentially nasty trap lurking in the loan; a substantial penalty if they refinanced within the first two years.
· Nearly a quarter could not correctly identify the total amount of settlement costs.
Mortgage companies would argue that mortgage products now cater for a diverse customer base with different financing needs. However, this argument looks rather weak in the face of these survey results. If people don't understand the products, how can they identify which loan is best for them?
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6 comments:
Anonymous said...
Washington DC Area Suburbs See Rise in Foreclosures
Even Affluent Neighborhoods Feel Effects of Subprime Mortgage Free Fall
http://www.washingtonpost.com/wp-dyn/content/article/2007/06/29/AR2007062902582.html?hpid%3Dmoreheadlines&sub=AR
The Senate Banking Committee has been told that 2.2 million families nationwide face foreclosure as a result of loans they can't pay. Many home repossessions are expected to occur within the next two years as attractive low-interest "teaser" rates expire and mortgages adjust to reflect higher payments.
"Everybody in the industry knew what was coming when you start loosening the criteria for making loans, allowing anybody to get a loan for anything," said Beau Brincefield, an Alexandria real estate lawyer. "Sooner or later, the chickens come home to roost."
Anonymous said...
Sadly, there are a lot of 4 year college undergrads signing the dotted line, but not reading the full mortgage text and not understanding it.
They do this at their own peril.
Then all of the sudden it's time to stop what we're doing and help bail them out of an financial nightmare of their own ignorant making.
I don't enjoy watching people suffer, but these are the same idiots who talked down to renters like they were pieces of scum.
Anonymous said...
The coming collapse of the US dollar
http://ia.rediff.com/money/2007/jun/11dollar.htm
For some time now economists have been engaged in the mother of all debates: whether the US dollar would collapse by as much as 40% when compared to other currencies ( some are even betting on the US dollar going belly-up ) or whether there would be an orderly devaluation - that is, a gradual revaluation of other currencies vis-a-vis the US dollar.
In effect, the question that is confronting us is not 'whether' but 'when' and by 'how much.'
This global imbalance can be understood in economic terms by simply examining the massive size of America's twin deficits - trade and budgetary. Put modestly, Americans have been living way beyond their means, consuming much more than what they could possibly afford and, in the process, borrowing far beyond their capacity for too long.
Anonymous said...
Bill Moyers talks with financial columnist Gretchen Morgenson on the SEC, the mortgage crisis and other matters fiscal ...
http://www.pbs.org/moyers/journal/06292007/watch3.html
GRETCHEN MORGENSON: We're just starting to see, I think, the shaky ground that is the result of excessive amounts of loans made to people who could not afford them and excessive amounts of money thrown into the mortgage arena by investors who were very eager for high-yielding investments. I think it was a mania. It fed the real estate mania, the real estate bubble in many parts of the country.
GRETCHEN MORGENSON: I think we're going to have a protracted decline in real estate prices. And whether or not it depends what your circumstance is. Each person's different. Do they have equity in their home? Then they don't have to worry so much. If they don't have equity in their home and they have a mortgage that's going to reset at a higher rate because interest rates have risen, maybe they can't afford the mortgage anymore. Maybe their house is going to go on the market. It's going to be a long, unwinding process. It's not going to be pretty. It's going to have a negative or a pressure effect on real estate. We've already seen it to some degree. And I just think that people are going to be less willing to take risk. And that will extend into the corporate bond market, the ability for companies to raise money, their interest costs will go up. They'll have to pay investors more because investors are going to say, "Wait a minute. I'm afraid of risk here. I'm going to demand more money for my investment dollar." Companies will have to pay more. It's going to have a major impact.
BILL MOYERS: So who's responsible for this fiasco?
GRETCHEN MORGENSON: Wall Street is responsible. Investors, to some degree, are responsible. They were clamoring for yield. They wanted more return on their investments. Regulators were asleep at the switch. Bond rating agencies were asleep at the switch. They're supposed to be out there telling people this is a solid company or this is a solid loan or this is not. There were a lot, a lot of fail safes that failed.
BILL MOYERS: Are we living in a new gilded age?
GRETCHEN MORGENSON: Absolutely. A new gilded age. Except this time around, instead of when we had Vanderbilts and Goulds and Morgans and pick your name, building --
BILL MOYERS: Rockefellers.
GRETCHEN MORGENSON: -- physical assets that produced goods that people bought or transported --
BILL MOYERS: Railroads -- railroad steel firms.
GRETCHEN MORGENSON: -- goods. Correct.
BILL MOYERS: Right? Right.
GRETCHEN MORGENSON: Now, this gilded age is all about pushing paper around and making money on money.
BILL MOYERS: Financial engineering.
GRETCHEN MORGENSON: Financial engineering. Exactly.
Anonymous said...
Hedge Funds Mystify Markets, Regulators
Deeply Powerful, Largely Unchecked
http://www.washingtonpost.com/wp-dyn/content/article/2007/07/03/AR2007070302240.html?hpid%3Dtopnews&sub=AR
"Wall Street creates all these increasingly sophisticated financial products, and no one really seems to understand them but the people involved in creating them," said Dan Freed, a senior writer at Investment Dealer's Digest. "They assure everybody that everything's going to be okay, and we are forced to believe them."
Anonymous said...
Key home sale index slides to 6-year low
Reading of pending home sales sinks to lowest since September 2001, suggesting more pain for the housing market.
http://money.cnn.com/2007/07/03/news/economy/pending_home_sales/index.htm?postversion=2007070310
Existing home sales are likely to see more declines in coming months as a key reading of pending deals fell to nearly a six-year low in May.
Home sales continue to be hit by tighter lending criteria due to problems with subprime mortgages, loans to buyers with weak credit, coupled with and a lack of buyer confidence in the market.