Before I began working on the
Foreclosure Project, my knowledge of the effects of the 2008 housing tragedies
was, in hindsight, admittedly limited, peripheral, and perhaps even a bit
unattached. It is decidedly difficult to piece together all of the bits of
information from various sources about adjustable rate mortgages with payment
caps, homeless statistics and ever fluctuating foreclosure rates, especially in
passing as you prioritize and manage the more immediate aspects of your life.
It proves to be even more difficult
when the reports seem to indicate that conditions have improved and perhaps the
crisis is over. Most people are able to recognize and digest a statistic such
as a 9% foreclosure rate. But how does one make that meaningful? Would it be better
to say that’s nearly 1 out of every 10 homes? What does “predatory lending
practices” even mean?
Consider this scenario: A bank
lends a family an adjustable rate mortgage for the total loan amount of
$147,000. They have an initial rate of 7%. They are reasonably concerned that
if the interest rate increases, they will not be able to afford their payments,
but the bank assures them that they have a payment cap, which means that their
payments will not increase more than 5% from their payments the year before.
They happily accept this loan, conceding to a margin of 2%. In year 2 their
interest rate remains at 7%. In year 3 it increases to 8.5%; year 4, 9.5%; and
year 5, 11%. What do all these terms and numbers mean? If this family makes
every payment on time, their loan balance at the end of five years is
$157,527.58. This is more than $10,000 over the initial loan amount! What
happens if the property value decreases? Have the consequences of these types
of loans been remedied?
Posted by Racheal V. Hammond on Sun. March 1, 2015 11:34 PM