with the mortgage crises, didn't people know their rates would reset?

Question

I am not understanding the mortgage crises that is occuring right now. There are a lot of people who have lost their homes or are about to. Some people lose their houses because they lost their job or were injured and had a change in income unexpectedly...that's different. What I am not understanding is how people are struggling with their mortgages because the rate set....didn't people know when they made the loan that the rates would reset? didn't they question what the worst case scenario would be in terms of their ability to afford the payments? I guess I don't understand the lack of foresight in individuals. What happened?

Answer 1

Yes, they knew. It is spelled out, with the amount and the exact date it will happen.

You do not understand their foresight because they had none.

Most actually seemed to think they would sell their house and become rich. Any sane person could tell you that short term gain is, and always has been, a rare occurance in real estate.

Answer 2

I suspect several factors were in play:

too many people don't have a buyer's agent when they buy and so no one is really looking out for their interests and people just don't get financial things in too many cases

some folks who did have agents had ones that gave bad advice: look at the house you can afford--only 3% interest! Sure for maybe 5 years, then, look out!

there are a variety of factors that lead to high housing costs--from governmental restrictions and requirements for "open land" and all the rest to speculation in the market. Some folks decided, Have to do it some time and the market just goes up, up, up. Yes it does, then it comes crashing down. People WILL forget and one day the market will go up, up, up again--but....

some folks assume their incomes will rise or they will be able to pinch pennies or whatever. We can make it work! While optimism is a good trait in many cases there is a point where it is dangerous.

some of the loans out there are just deceptive. I don't think people "get" "negative amortization" and such--you can end up owing more than your house is worth (even in an up market). This does NOT make sense to people who WOULD think of it with a car purchase, for example.

finally people mistakenly believe "experts" will not let them bite off more than they can chew. HA!

I'm sure I missed some good reasons as well, but yes, the major mess was a combo of greed on the part of many lenders (entice them in, lull them into a false sense of security, then BAM!) and ignorance or wishful thinking on the part of people who wanted a home. Every loan MUST include a table of payments AND all adjustable rates must also reveal the good and BAD news. Over the course of 30 years, WHY would anyone believe that interest rates would remain at "historical lows." That's why I have a 30-year-fixed. I paid more for a few years, then all of a sudden my rate looks LOW. If people weren't so put off by math and logic we would not be in this mess. Delayed gratification is also something that helps prevent these nightmares.

Answer 3

Many people counted on the a continuation of the escalation in real estate values, and had intent to refinance into a conventional thirty year fixed at the terminus of the ARM. Sadly, real estate values dropped instead, and these folks could no longer refinance without bringing tens of thousands of dollars in cash to the closing table to refinance, since they now owed more than the house was worth.

It was a gamble on their part, and they lost that gamble.

Answer 4

A few years ago, people were being advised to take out ARMS if they planned to live in their homes for five years or less.

Back in ’03, my college accounting professor, a CPA who worked for the IRS for 20 years, spent an entire day of our class talking about first time home ownership and made a big deal about how great ARMs were for first time home buyers because we’d probably be selling that first house within five years anyway. His logic made perfect sense to me until my husband became a real estate agent, and we learned more about them.

Answer 5

These people GAMBLED that the rates would not go up....and they did.

That is what happens when you gamble with an ARM...sometimes you win, sometimes you lose.

People were also foolish in not maintaining their credit or running up credit cards, and that is why alot of them are unable to refinance.

Answer 6

they thought the value would ncrease and they could refinance the values decreased and the banks shut their doors not allowing people to refinance and increasing their rates onm the ARM loans increasing a 5.5% loan to 12 and 14%

Answer 7

Agreed! The borrowers were provided the legal disclosures stating their interest rate would change. Obviously, that also means their payment amount would change too.