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The most obvious failure of our education system is the number of ‘educated’ people who are financially illiterate and seem to have no concept of personal responsibility.

This story was recently presented at KARE11 news about the Nelson family.

The Nelsons jumped at the chance to take more than $100,000 in equity from the house they originally purchased in 1999 for $117,000. The new 2005 mortgage was for $240,000. They applied for another 30-year fixed-rate loan, but they say their broker told them they only qualified for an Adjustable Rate Mortgage (or ARM).

They “jumped” at the chance to dig themselves $123,000 deeper into debt on an adjustable rate mortgage? I barely passed the 8th grade and I know that’s foolish. At 25, when I purchased my first home, the broker told me I could buy a bigger house in a better neighborhood if I took an ARM instead of a conventional mortgage. I saw the obvious risks and said no. But this next paragraph really gets me…

They had been lured in with a so-called teaser interest rate of 6.9 percent. The monthly payment was about $1500. It was steep, but Shawn and Roxanne managed. They didn’t realize that the rate would jump to 8.9 percent after just two years and readjust every six months after that. Shawn sighs, “Signing all those documents, I couldn’t tell you what I signed.”

They were lured? To me “lured” is what a pervert does to a child using a bag of candy. It implies something sinister and immoral. Wouldn’t “offered” be a little less biased?

Then… He couldn’t tell you what he signed? Whose fault is that? He didn’t say the lender lied to him, he said he didn’t know. Whose responsibility is it to understand what you are signing? I bought my first house when I was 25, my wife slung hash at a burger joint, I drove a truck, and I had enough sense to pay an attorney $400 bucks to come to the closing and look at every piece of paper I signed and explain it to me. It was worth it, because he saved me over a $1,000 in closing costs and prevented me from signing several unnecessary agreements.

In the fine print of one of the documents they signed in 2005, was a pre-payment penalty. It would cost the Nelsons an additional $3,000-$4,000 to pay off the ARM with another mortgage. It is money they don’t have.

He didn’t know there was a penalty for early payment? Whose fault is that? Did he ask? Did he read the documents?

The biggest problem facing Shawn and Roxanne is a move by their mortgage company that they caught them completely by surprise. The lender ordered an appraisal of the house in 2005, but only notified the Nelsons of the amount in 2007. The house was appraised at $268,000. The effect of that appraisal is to make any new refinancing almost impossible. The Nelson’s spoke with realtors who told them the house could sell for no more than $225,000. Since the Nelsons’ mortgage was for $240,000, there is no equity left in the home.

He didn’t ask to see the appraisal value before he signed the mortgage? They make it sound like he didn’t understand the amount of his loan, the interest rate, the payment terms, and the value of the home. Maybe he didn’t. But whose responsibility is it to ask? The article goes on to blame the mortgage company for the $268,000 appraisal, but home values have dropped since 2005. Having a mortgage that is higher than the value of your home is always a risk, especially with nothing down. It’s common sense.

“We cannot afford that at all. At this time, I’m the only one working. My husband’s a teacher and he’s laid-off at this time.”

Earlier in the article, he says he has a degree and is working on his masters… I’m sorry… but cmon’… I live in Minnesota…unemployment is very low. He could find a way to make some money, it might not be the teaching job he wants, but he could contribute financially. There is a way.

Shawn lowers his head. “The hard part for me is knowing that I’m supposed to be providing for my family. We got ourselves into this situation, but it’s not because of something we did on purpose.”

Huh? Shawn may not have planned it this way, but his decisions caused it.

Who took out a $240,000 ARM without an income?

Who failed to question the interest rate and the risks?

Who failed to ask if there was a penalty for early payment?

Who failed to question and understand the appraisal?

I am baffled by this. While I can’t believe any lending institution would borrow loan Shawn this amount of money, I am equally baffled by an educated teacher who understands so little about personal finance. I could understand if it was an elderly person, or someone mentally deficient, or even someone unfamiliar with our language and culture, but this guy has no excuse.

I met another guy last year who told me a lender offered him a $300,000 ARM with nothing down which would have created a 55% debt to income ratio. Think about that? After SSI, medicare, income taxes, and your mortgage payment you’d be living on 10-15% of your income (the home maintenance alone will cost another 10%). It is irresponsible to make these loans, but it is also irresponsible to take them when it is clear you can’t afford them.

When I started looking for a new home in 2004, I hadn’t shopped for a mortgage in 10 years. In 1994 lenders would not allow a borrower to extend themselves past a 32% debt to income ratio. So in 2004 when I asked my mortgage guy how much I could afford, I was stunned when he said, “pretty much whatever you want.”

I asked for clarification, “I can borrow any amount I want? 700K? 800K?”

“Yes”, he replied.

“What about debt to income ratio?” I asked.

He said, “Don’t worry about it, we can find a way around that. It just doesn’t matter as much as it used to.”

I instantly realized that game had changed in the last 10 years. While the lender used to show restraint on loan amounts, now I needed to show restraint and judgement. We decided not to extend ourselves past a 25% debt to income ratio and we bought far less than we could afford.

In retrospect, I still paid too much for my house because similar houses in the area are now selling for less than we paid. But that was the insanity of the 2004 market – everyone was paying too much and it happened to be the year we needed more square feet to expand Christine’s home business. But we’re still okay financially because we didn’t buy the home as an investment, and we didn’t over extend ourselves.

The housing market correction is going to be painful for many people, but most have no one to blame but themselves. No one forced them to pay over-inflated prices with risky mortgages; they did it voluntarily. They may have done it because of financial ignorance, but for educated people in the information age, there is little excuse for financial ignorance.

Sorry if that came across and little mean and arrogant… but sheesh! These “victims of a predatory lender” stories drive me nuts.