Avoiding a Future Foreclose Disaster through Proactive Education

by Kim Huffstetler
Axia College of the University of Phoenix

Semifinalist

I am 33 years old and a homeowner of six years. Now that you know that, ask me what I remember learning in high school. I remember learning how ATP converts food into energy. I could tell you more about parabolas than you would care to hear. I might be able to conjure up a sentence or two in French, and I could even tell you what a profound impact my trip to the Harvard Model Congress had on my outlook on politics. But like many high school students suffering through core classes filled with information one could care little about, much of what I learned could fall into the category of "when will I ever use this information in real life?"

Therein lays the problem — the lack of educational focus on "real life" issues. Not all students go on to college, and some go later in life, like me. Not all students go on to learn and understand the stock market, tax laws, and mortgage rates. In fact, most do not ever learn unless it specifically applies to them. But alas, it does apply to them! The saddest thing is they will get their education from someone with something to sell.

My Own Mortgage Experience

I can remember getting my first mortgage when I was 27. We did not know one thing about rates, interest compilation, FHA fees, mortgage insurance, homeowner's insurance, or any other thing pertaining to purchasing or owning a home. We were nearly convinced that renting made far more sense than owning, and our projected house payment was the scariest number we could imagine. We did not know what questions to ask or even if we were getting a fair rate. Our first mortgage was financed at 5.625%, but we had been quoted as high as 9% from other brokers. Plus our realtor washed over all our rights and hid the fees we should have been educated about long before.

So when we went for our second home four years later, I decided I was not going to be taken advantage of. I was going to speak with someone who would educate me on loan options, interest rates, principle balances and prepayments, mortgage insurance premiums, and what they really mean. I was determined I was going to get this information from someone with nothing to gain from sharing it freely with me. But who could that be? It did end up being a salesperson, but an extremely caring lady from one of the leading lenders in the US. Certainly she did want to sell me something, but more than that she wanted me to understand what I was doing.

See, the second time around we had decided to buy new. What this meant is that the builder was not only trying to sell us the home but the loan as well. They would say or do anything to get those papers signed! When I was dealing with my mortgage "teacher" on one end, learning about origination fees, interest-only loans, balloon payments, and point buy-downs, the builder's representatives were telling me everything I could possibly want to hear. In the end, I did learn. But we also went with the builder's lender because they hid their incentives in the cost of our home.

Yet here I am, two years later in the process of a re-finance. We are paying the FHA fee all over again, tacking it on to our current mortgage, bringing us back up to our original principle balance. We attempted to get (but were denied) government help with our loan because the payments were literally crippling our savings, sucking the money out faster than we could make it. When the lender "qualified us" for our loan, they said that 56% was a perfectly acceptable debt-to-income-ratio. They did not care that we paid an average of $1600 a month to daycare — there was no place on the loan application for that information. They did not consider groceries or gas or utilities — they barely even weighed our gross against our net income. Once again, therein laid the problem.

Identification

We are not alone in our predicament. One need only look at the historic foreclosure figures of the past decade to see that not many people are educated on the system of home finance, and the system is designed to stay that way. There are numerous loan "products" to choose from, hidden fees and costs, and hordes of lenders competing fiercely to get their piece of the interest pie. And the one thing that is most glaringly lacking is education.

The bottom line is that education on the managing of finances must be taught. Unfortunately, this is typically a lesson learned through trial and error on the part of individuals. But how can that be fair when the making of the associated mistakes comes at so high a price? Look at a ruined credit record — 7 years and thousands of dollars in interest and fees. Look at a home foreclosure — a ruined credit record and 3-5 years before the possibility of purchasing another home. It is astounding; it is unfair; yet worse than these, it is avoidable.

The key to staving off another mortgage crisis is being proactive. Students need to be educated in high school by caring professionals, not pressured to make rash, monumental decisions by someone who simply wants them to sign the dotted line. They need to be taught about down-payments, amortization schedules, and interest rates in a classroom where they can ask intelligent questions and receive honest answers. They need to be shown how to budget their family's finances and create a cushion for unforeseen circumstances, immediate needs, or incidentals they had not counted in their bills. They need to understand their options and the financial obligations they are making when they leave the comfort of their parents' homes.

We have to look at the big picture as well as the individual crisis of the unaffordable nature of loan products which brought us to our current crisis. The interest-only loan was a major culprit on the recent housing crisis. People were persuaded to buy homes which they could not afford, enticed with low payments which only lasted for a breath of time, and crippled by the balloon payments which resulted when their interest rates shot up and their loans were re-amortized. Yet they did not expect it; they did not know. Many of them should not have been qualified for their loans to begin with. If the practices of leaving off key bills and other financial obligations from loan applications in order to sell a home are part of the criteria for loan officers of our day, the American people need to be aware of it. And this should not occur after the fact — but long before. Because this financial crisis affected more than just the unfortunate masses that lost their homes and ruined their credit, it sent our nation into a spiraling economic depression complete with bank bailouts, bankruptcies, and a tumultuous stock market. Economic prosperity is intricately tied to the American homeowner and cannot be eradicated.

The Plan

High school curriculum needs to be thoughtfully and carefully created and systematically implemented. This need not be a one-time course, an elective, or an option. Rather the repeated exposure to the information is imperative to make instruction successful. The answer is simple: teach them the basics when they first arrive, expand it in the subsequent years, and review-review-review!

Ninth Grade

Here is the grade when students are just entering high school, and most of them are beginning in Algebra I. They are learning formulas, percentages, and interest calculation. What better time than now to begin demonstrating the reality of these principles? Of course, text books have already been written, but students need to be encouraged to go beyond what is required in class, to go home to their parents and talk about credit card percentages, mortgage payments, and interest accumulation. They need to be provided with actual statements to look at, analyze, and understand. The incentive to learn these things could be extra credit in the classroom, or competitive nationally in the form of essays for scholarship money. Though the acquiring of this basic knowledge would be mandatory, in-depth understanding needs to be rewarded.

Tenth Grade

Now it gets a bit trickier. Tenth grade math is typically Geometry — more formulas, but less chance for real-life application of last year's knowledge. So instead of looking to the math classroom for education, perhaps we shift our focus to the social studies classroom. Curriculum requirements could be seamlessly integrated into the traditional Economics class where students are beginning to learn about supply and demand, principles of diminishing marginal satisfaction, and social expectations.

Here, focus needs to be placed on social responsibility. Students need to learn that their actions are bigger than themselves and their families. Talking about homes and communities should encompass re-visitation of mortgages and credit cards from the previous year. Students should be expected to demonstrate real understanding of life-expectancies, savings for the future, and the raising of children to be responsible citizens.

Eleventh Grade

Now math classes return to formulas and percentage calculations as many students enter

Algebra II. This is a perfect opportunity to expand previous principles to the vaster area of amortization schedules, loan pay-offs, and actual interest paid. Real mortgage and credit card statements need to be re-introduced so students have the opportunity to recognize how much interest is actually accumulating the mechanism. Of course all students do not go on to Algebra II, but even these students can be taught these principles in their own math classes. Many will find it shocking to learn how interest is front-loaded and how little money is actually being paid down on their original loan principle with each payment. This is a prime opportunity to show students that their responsibility is to understand their own finances and not borrow beyond their means. Attention needs to be paid to real-life household budgeting, unexpected expenses and the effect of emergencies, and he necessity of insurance protection.

Senior Year

Now that a strong foundation has been laid, it is time for review. This class needs to be its own separate entity &mdash Finance and Life Management. Here, in addition to review of previous information, the final piece of the puzzle must be added. This is the discussion of actual loan products, builder and loan officer tactics, and consequences. Students should be able to fully comprehend the impact of taking advantage of some of the more attractive loan products on the market such as adjustable rate mortgages (ARMS) and interest-only arms. Historical implications of these products must be talked about, while a thorough study of the past decade or two of actual interest rate fluctuations should be understood in order to deter students from entering into an unwise mortgage decision in their own futures.

The Bottom Line

Life lessons are imperative for high school students. For those that do not go to college but move straight into the "real world", child rearing, finances, and home management are not just meaningless electives which could be available in high school curriculum, but should be mandatory core classes which should not be endured but revered as investments in one's own future.

As a nation, let us learn from this financial catastrophe. Let us teach our youth must what they must learn in order to avoid a similar or more disastrous predicament in the future. Let us create a mandatory education curriculum for high school juniors and seniors that will actually prepare them for the realities of life after school. Finally, let us prioritize the life lessons which are far more important than study periods, trivial electives, and "free time". Because that time will eventually not be free, but come at a price much higher than many would be willing or able to pay.

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