Why do people borrow money (mortgages) when they can't realistically expect to keep up with the payments?

Question

I was raised/taught/learned to be rather conservative when borrowing money...why didn't so many other people grow up with this basic understanding of economics.

I guess I was raised/educated to Buyer Beware...

Answer 1

"Personal Accountability" is being done away with starting in kindergarten.As the youth of today and the last generation proceed through life and school,they are taught that they are "special" and can therefore do no wrong.Can't read:it's OK.Can't do simple math without the aid of a calculator:don't worry,you won't need those skills.etc

Answer 2

What happened in the real estate market was mostly some version of the same problem. People took out ridiculous mortgages that offered very low payments at first and then those payment would skyrocket later. The reason for this was that they intended to re-finance to a fixed rate mortgage before that happened.

What went wrong was that the bottom fell out of the overheated real estate market. Suddenly, the house they bought was worth less. That meant that the mortgage companies would not allow them to re-finance since the property was no longer worth what they owed.

When the house did not increase in value they were left holding an impossible mortgage. Understand this, however, many got away with it. Plenty of people bought huge houses with little money down and managed to re-finance them at a fixed rate before the bottom fell out.

You must also consider that a lot of real estate speculators used these type of loans. They had no intention of ever living in the house. They were just "flipping" the house to make a killing. They were buying low, paying tiny monthly payments until they could resell it for a profit. When the market slowed they could not sell it and the monthly payments shot up. So, they simply walked away from the house.

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Answer 3

You cannot only blame the borrowers. Most were told different than they are living.

Sub-prime lenders sold mortgages to people who had to pay higher interests rates. In turn, the lenders sold the mortgages to other companies (which is how almost all long-term debts are handled with the exception of charge cards), who raised the interest rate according to the terms set forth by adjustable rate mortgages.

It is a complex situation where most buyers were sold mortgages they could afford at the time, but when the mortgages were sold, the interest rates tacked on too many extra dollars. People went with companies they thought they could trust, and learned the hard way that all companies aren't looking out for their consumers.

I am not saying the borrowers are innocent, but you need to cast equal blame on all parties.

Answer 4

Many Americans are not sophisticated about lending practices. Some were not familiar with the reality of the adjustable rate mortgage and thought they would be able to handle slight increases.

The predatory lending practices are not limited to sub prime mortgage lenders. Credit card companies often charge individuals over 20% interest if they are late on a payment. Many Americans are caught in the cycle of neverending credit card payments. The debt situation in the US is getting worse.

Answer 5

Such loans were generally written with the expectation that the borrower's income would rise, and that the price of the propperty would rise even faster.

The idea was you buy something you can't quite afford, today, and, in a few years, you'll be able to afford it. But, if you had waited those few years, it's price would have increased even more than your income, and you still wouldn't be able to afford it.

It assumed a never-ending real estate boom. Something that is often assumed, but has never actually happened.

What actually happenned was that wages haven't gone up much, if at all, and prices have stagnated or dropped, so waiting would, indeed, have been the better option.

Answer 6

A lot of the blame for this must be laid at the door of the lenders. Cheap introductory offers, not checking the borrower's financial situation, pressure advertising to name but a few.

Then there are (or rather were) large fluctuations of interest rates, especially in the 1980s for example.

Also the volatile job market, which leads to unexpexted redundancies.

Don't automatically blame the borrowers; although some may be feckless, the majority who get into financial difficulties do so through no fault of their own. Nobody would intentionally go through the trauma of losing their home.

Answer 7

Many people are getting into trouble with the ARM's, Adjustable Rate Mortgages. They start with a low payment and then after a few years the interest rate, and thus the payment, go up and they find themselves in a bind. They haven't been told that they should refinance before the rate goes up to a fixed rate mortgage.

Answer 8

Media teaches "its OK to have bad credit come on in we will get you financed". Very much predatory lending when rates can be infinity for buy here pay here. It all comes back to the simplistic of schooling our citizens, but even the teachers can't understand lending techniques and how interest compounds for themselves. A lesson the media is hoping no one will learn, soon that is.

Answer 9

The better question is why did lenders give them the money when they knew they couldn't pay them back and would likely end up foreclosing. And where were the consumer protections that are supposed to protect people? And why were bankruptcy laws re-written to favor creditors so heavily?

Answer 10

They are stuck in that dream of a home family! Thank god i didn't get tuck in all of that but so many of my friend and even family are loosing their homes all over a dream!