-Frank

And it didn’t happen, or they failed to adjust their budget in preparation for the upcoming rate hike – something they should have started from year 1, or their debt increased!

Or worse they were already deep in debt with a nice mortgage and mountains of equity, and fell for the ‘refinance and consolidate’ loans, dumped their unsecured debt into their house (with poor terms due to their now poor credit) and fell back into the debt trap years later – leaving them with a bad loan, more debt, and a mortgage payment that suddenly jumps a quarter.

A CNN article recently said that the most common subprime at risk of default was a refi. If you’re refinancing with bad credit, this makes me think other problems exist driving you into the bad loan, the last card before the whole thing collapses.

I put borrowers at the top of that list (and am shocked and disappointed that they aren’t even on the list at all!) and blame lenders, brokers, etc for only a small percentage of these loans. An even smaller percentage warrant investigation.

However I will admit that when purchasing my house, even after doing exhaustive research in books and the internet regarding purchasing a home, mortgages, loan terms, rates, taxes, escrows, insurance, etc…the final loan documents were still a struggle to read and understand.

Hand-holding and spoon-feeding stops at 18; unfortunately, most Americans have a hard time getting this.

Go read a book, a few Google’s and looking around on Amazon and Barnes and Noble reveals several sources that can aide the consumer in being knowledgeable.

They choose not to read into the terms, they choose not to understand, and they choose to believe that their lender/Realtor are working in their interests (I know – some are, but the point is some *are not*).

People are only interested in the immediate – what I have to pay right now – and not in the future (they said I could refinance for lower payments, plus.. equity! better credit for me to max out!)

It’s one of those things that’s lead me to heavily weigh my house buying options (and continues to do so).

I hear ya. Unfortunately, who’s fault is it that the average person doesn’t understand a mortgage?

I think you could make a very strong case that it is the fault of the banks and brokers. Do they really need to make the documents dozens of pages long and all written in technical language that is not very accessible to those outside the industry?

And I don’t think that the information to help consumers is very accessible. I don’t even know what reputable website I would send someone to for information about ARMs. Where in the library is someone supposed to look to see if they are getting screwed? With all due respect to you and other bloggers, you guys should not be, and simply are not a very good first line of defense for consumers in this case.

As one simple example of how the government could help disclosure, look at what is done for home equity lines of credit. When applying for a HELOC, applicants must be given a handout from the federal reserve which explains how it works in plain language. (This is a regulatory requirement.) It spells out very clearly that interest rates can and will change, and what the historic averages have been among other important points. If a similar disclosure were given to consumers applying for an option ARM I’m willing to bet a large number of people would not go through with the loan. Those who don’t, well then I can say they were adequately warned and they get what they deserve.

I still believe it is on people to become educated about what they’re getting into especially when you’re spending several times your annual income on a purchase. And don’t say the tools are available to these people either; they’re able to walk into a public library and hop on the internet any time to research the terms of their mortgages.

Ignorance as a touchstone of American culture is the real problem.