9/16/2008

Even A Middle School Student Could Get It


Quote of the week:

"Amid the extraordinary financial events of the last few days, the Fed kept monetary policy on hold. In doing so, the Fed made clear its desire, to the extent possible, to separate its monetary policy decisions from the circumstances surrounding particular financial institutions." -- Peter Kretzmer, economist at Bank of America (my italics). And we also learn today that the Federal Reserve will not reduce the rate.

In times of market volatility it's easy to speculate on impacts, effects, and the future--overall negativity. Unfortunately, the subprime mortgage fallout is having a continuing story in the downfall of certain financial institutions. The story of this down market is not one of major job loss, as it was in the 1990's, where people declared bankruptcy and lost their houses due to lack of income--it's one characterized by the wrong loans for the wrong borrower, often made with lack of disclosure. Bank of America, for example, is still standing because it did not join the subprime bandwagon, although it certainly offered many loans with more flexible guidelines that it doesn't offer now. The worst part of all this, in the end, is that fewer banks will be around for consumer choice--at least that's the way it looks now.

One of the terms buyers need to know is "RESPA", which stands afor Real Estate Settlement Pratices Act. Before you assume this is something totally boring and far too much legalese, just remember that one of the reasons borrowers got into trouble is that they didn't understand their costs statement, didn't really look at their Good Faith Estimate required by the borrower to give to them--if they had, and if they knew just a little bit more about the basis of loan financing, they might not have ended up with what they did.

Unfortunately, these things are not taught in high school, even a middle school student could get it (parents, you must know that sometimes I get phone calls from kids who're reading my blog and have a question), but buyers under the crunch of fast decision making are encountering terms and practices they have infrequent or no experience with.

Reform of the RESPA is underway, with the end goal of making disclosures to buyer easier and more clear. That's still not a guarantee that the end result will be less complicated than what we have now, just different.

In the end, buyers need to familiarize themselves with their proposed loan, and their upcoming home purchase, and take the time to do it.

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