Mortgage Ignorance
Unknown Types of Loans
By Daniel Muniz

GfK Roper Public Affairs & Media was commissioned by Bankrate.com to conduct a national survey that accounted for all demographics about home ownership. And what was revealed was quite shocking.

About 34 percent of homeowners didn’t have a clue about what kind of mortgage they currently had. They knew that they were making payments to something in connection to their house but this group of people really had no idea of what they were paying for or what they were actually going to get out of it.

Such a revelation is deeply disturbing and it ought to be alarming because it may very well be indicative of the crisis of foreclosed mortgages that has swept the nation. Overall, too many consumers didn’t know what they were getting themselves into when they signed across the dotted line. And if they didn’t know what kind of hole they dug themselves into, they certainly will not know how dig themselves out of it.

But why are so many people this ignorant about the biggest purchase in life?
 

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And to make matters worse, about 34 percent of homeowners with adjustable rate mortgages (ARM) also didn’t know what they were going to do when their mortgage rate would eventually go through the roof. Apparently, they just liked the low payment so much that they didn’t want to worry about the day when they could no longer afford making their house payments. And with the huge number of foreclosures of ARM mortgages as well the loans that had teaser rates, these homeowners had to face the harsh reality of not being able to keep their houses.

However, ignorance like this is really not all that uncommon when all aspects of finances are taken into account.

For example, there is a segment of society that still believes in the retirement fairy. They have made absolutely no financial preparations for their old age and they haven’t planned how it will be financed when they are unable to work. It is not as if they were unaware that they were going to get old, it is just that they refused to make arrangements for it even though they had a few decades to get ready for it.

In addition, there are others who are solely relying on social security. They simply expect it to be a welfare program that ought to take care of all of their needs instead of as its original purpose as a supplement to retirement. As a result, these people are bitterly upset that social security makes for such a lousy retirement.

So if a lot of people already believe in the retirement fairy, it should not be that far of a stretch that a segment of society to also believe in the mortgage fairy. That is, wishful thinking that someone or something is going to wave a magic wand and solve all of their financial problems without taking personal responsibility for it.

Some experts argue that the ignorance of mortgages is result of the complex nature of these contractual obligations. For example, CEO of NeighborWorks America, Ken Wade explains:
 

"That's a symptom of the complexity of the mortgage market today." Source: Bankrate.com

I don’t buy that rationale for a minute. Your mortgage, just like your retirement, is one of the most important financial decisions of your life but some people are just reckless with it.

And unfortunately, others are too naïve to confront some harsh realities.

For instance, when I was buying my first house, there was a vast array of options available to me although nearly all of them were just some derivative of the ARM. I asked my mortgage broker about this particular zero down payment mortgage package that was offered from a credit union that I was a member of. After my mortgage broker explained all the details to me, I quickly determined that it was no deal at all but a big rip off. The broker just smiled at me as said that there is no such thing as a free lunch such as having no down payment.

And that is so true of all of these awful sub-prime mortgages and convoluted risky mortgage options.

It is not as much as being confused about all of these mortgages but more of a case of expecting to get a free lunch. As a result, these mortgage companies are more than willing to sell false hope to an eager buyer who doesn’t want to delve all that deeply into the details.

So in other words, there are actually two culprits in the mortgage mess. It is the buyer wanting something for nothing and the seller who is perfecting willing to sell such a bogus package.

Could the sub-prime and risky mortgage debacle have been averted?

There has always been a problem of implementing oppressive governmental regulations because it usually ends up stifling the free market which hurts consumers in the long run. But one important aspect that has escaped the debate of the mortgage mess is that there was huge number of people who wanted to be lied to about being able to afford a house and there were an equally huge number of lenders willing to lie to them.

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