EDUCATING THE NEXT GENERATION OF HOMEBUYERS: HOME BUYING 101

by James Balagia
Austin Community College

Semifinalist

Today, more than four years after the beginning of the foreclosure crisis, defaults on mortgage loans and foreclosure numbers are at a staggering all time high, despite a plethora of industry programs and ideas designed to stop the bleeding of foreclosures nationwide. An afflicted housing market persists as the foreclosure epidemic has forced families from their homes and left neighborhoods peppered with vacant properties. Real estate values have plunged and forecasters predict the market has yet to hit rock bottom. While this problem screams for a national regulatory plan of action, perhaps the answer lies with the next generation of homebuyers. By educating the country's future homebuyers, the United States may well prevent another debacle like the meltdown currently occurring coast to coast.

While the government works to calm the storm of foreclosures by addressing Wall Street's practice of conducting business without oversight, encouraging loan modification programs, considering right to rent programs, and shorts sales, lawmakers would be well advised to overt another crisis by legislating high school curriculum with Home Buying 101. Na??ve homeowners have shouldered much of the blame for the current crisis as many agreed to home loan terms they didn't fully understand, and therefore weren't able to repay from the onset. Many Americans enter the process with little to no knowledge of the mortgage industry. With a country full of an astute home buying public, the aforementioned market currently saturated with distressed properties, will be replaced with a vibrant, healthy housing market. The curriculum should cover the following:

• Teaser Mortgage Rates
• Planning for a Housing Bust
• Fixed Rate Mortgages
• Conventional Loans vs. Unconventional Loans
• Establishing, Earning and Maintaining Good Credit
• Planning for a Rainy Day
• Practical vs. Emotional Home Buying
• Skin in the Game

The course syllabus for Home Buying 101 will contain the following:

Teaser Mortgage Rates:

What's an ARM? Introductory Rates, Option Arms, 2-1 Buy Downs, Balloon Notes, Interest Only Loans, Negative Amortization Loans.

Planning for a Housing Bust:

A study of the U.S. housing market throughout history, the booms and busts, and what we've learned from them.

Fixed Rate Mortgages:

A practical guide. FHA, VA, no prepayment penalty.

Conventional Loans vs. Unconventional Loans:

Rarely a borrower or lender's first choice. Creative financing for borrowers with unworthy credit, interest only loans, negative amortization loans. Who are Freddie Mac and Fannie Mae?

Establishing, Earning and Maintaining Good Credit:

Starting small, paying bills on time, keeping credit card debt at 50% of available credit. Check credit score regularly.

Planning for a Rainy Day:

Job loss, family illness or accident, market crash.

Practical vs. Emotional Home Buying:

Avoiding catastrophic pitfalls of compromising your future for a home loan. The repercussions of damaged credit.

Skin in the Game:

Save, save, save. Avoid loans requiring less than 20% down payment.

Students will be taught such things as going outside of a bank or a qualified mortgage lender for a mortgage loan is just like going to a loan shark for a personal loan. Potential homebuyers may deal with some seedy characters with not the most appealing payment terms. Students will be presented with the history of the housing booms and busts. For example, a lesson of the 1980s brought the establishment of the Chapter 12 Bankruptcy Code which resulted in fewer foreclosures by allowing loan modifications to reduce mortgage balances in cases where property values had dropped. If the next generation of homebuyers is taught to anticipate the cyclical changes to be expected in the country's housing market, and to factor in the unexpected such as job loss, economic downturns, inflation, etc., homebuyers will be better equipped to face the realities of serious financial struggles and make informed decisions to avoid them.

In addition to the high school education program, Home Buying 101, banks should be restricted from offering teaser mortgages which consists of a great introductory rate for the first couple of years on the mortgage. Too many homebuyers in recent years were quickly in trouble when their interest rate sky rocketed. These teaser rates led potential homebuyers to believe they could afford mortgages they really couldn't. Banks should be restricted from making sub prime loans to applicants whose credit is less than worthy. Investment banks should no longer be able to create mortgage backed securities and market those investments as safe with good returns. The ratings industry, who rates mortgage backed securities packages (CDOs — collateralized debt obligations) should be regulated so falsely inflated ratings are no longer granted. Additionally, "Robosigners," loan workers who approve foreclosure documents without reading them and the companies who employ such practices should face federal racketeering charges for such offenses.

To avoid another foreclosure crisis, the government must pass measures to protect consumers by offering safer loans. While this will slightly increase the cost of the loans, it will ensure:

• Lenders would be required to retain at least 10% of secured loans which are bundled and sold to investors as securities. Only mortgage loans which are low risk, such as fixed rate loans which require borrowers to provide full income documentation, would be allowed to be sold in their entirety to investors.
• Establish modification programs to be implemented once a mortgage loan goes sixty days past due.
• Lenders must do their due diligence in ensuring borrowers' ability to repay mortgage loans. For consumers, this will mean a significant amount of financial history — pay stubs, bank account statements, tax returns — to prove to lenders they can actually afford to pay back the loan. This could be problematic for borrowers with a small credit history and for self-employed borrowers.
• Commissions for loan officers and brokers should be a flat percentage rate of the total loan rather than variable on particular type of loan or rate.
• Appraisal regulations must be overhauled so that appraisers are registered and licensed by state agencies and their compensation is regulated by the state legislatures.

In Texas, the state requires all hunters over the age of 19 (and born after 1971) to take the Hunter Education Training Course for state certification to hunt. If each state would mandate that all high school students must complete mortgage curriculum to meet graduation requirements, and force mortgage lenders to require proof of the course and even have the applicant take a test on home buying prior to loan approval, then homebuyers would certainly come to the table more prepared than ever before to purchase their largest asset. By educating the next generation to consider the factors which lead to loan default and eventual foreclosure, we can reshape our economic future through education and regulation of the industry.

Works Cited

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Contrast, By. "Unconventional Mortgages and Loans." MoneyMatters101.com. Web. 28 Nov. 2010.
http://www.moneymatters101.com/mortgage/unconventionalmortgage.asp

"Foreclosure Crisis Needs Federal Response, Harvard's Porter Says - Bloomberg." Bloomberg - Business & Financial News, Breaking News Headlines. Web. 28 Nov. 2010.
http://www.bloomberg.com/news/2010-10-13/foreclosure-crisis-needs-federal-response-harvard-s-porter-says.html

"Keep It Simple: Stop the Foreclosure Crisis with the Right to Rent | Economy | AlterNet." Home | AlterNet. Web. 28 Nov. 2010.
http://www.alternet.org/economy/107572/keep_it_simple:_stop_the_foreclosure_crisis_with_the_right_to_rent/

"Past Foreclosure Crisis Provides Current Housing Market Solutions | WorldNewsVine." WorldNewsVine | We're What Free Speech Is All About. Web. 28 Nov. 2010.
http://worldnewsvine.com/2010/08/past-foreclosure-crisis-provides-current-housing-market-solutions/

Timiraos, By Nick. "How Financial Overhaul Changes the Mortgage Market - Developments - WSJ." WSJ Blogs - WSJ. Web. 28 Nov. 2010.
http://blogs.wsj.com/developments/2010/07/16/how-financial-overhaul-changes-the-mortgage-market/

Way, By The. "'Winning' And 'Empathy' At Bank Of America Call Center, Despite Alleged Mortgage Flaws." Breaking News and Opinion on The Huffington Post. Web. 28 Nov. 2010.
http://www.huffingtonpost.com/2010/11/16/bank-america-mortgage_n_784073.html

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