Reflections on the foreclosure crisis, part one

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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
Categories: Student Research
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