Foreclosure of a dream

I recently heard the sad story of a single mom who had her home foreclosed. This is a story that has become depressingly familiar and has been repeated thousands of times over and will be repeated thousands of times in the next few years. No two cases are exactly the same but they all seem to have a common thread running through them. However this story is worth repeating if for no other reason than to show how you can be seduced by easy credit only for the dream to turn sour. For those of you facing a similar situation take strength from the knowledge that you are not alone and that the mistakes you have made were not necessarily all your fault. For those of you in debt take a warning from this story as to how bad things can get if you do not face up to your problems now.

To protect her identity we will call her Michelle. Now Michelle came from a disadvantaged background to begin with. Her Dad left home when she was young and her Mom struggled to raise her and her two brothers the best she could. Michelle grew up with strong principles of right and wrong and despite her background she did well for herself.

Michelle was a hard working single mom. She had a job in a local company doing administrative work. She enjoyed her job. In spring 2005 she spotted an advert for mortgages. What caught her attention was the fact that the mortgages on offer were ‘no money down’ – she didn’t need a deposit or any assets to get the mortgage. Too good to be true.

Initially she was worried about being able to meet the mortgage payments and the fact that she had a spotty credit history due to some late payments on an auto loan. However when she called the mortgage broker she was assured that she would be able to afford the monthly repayments and that her credit history wouldn’t be a problem. In fact she was quite pleasantly surprised at the low monthly payments. This of course was to be her undoing. The mortgage broker either didn’t mention the rate reset on the mortgage or mentioned it in terms so obscure and alien to Michelle that she didn’t understand them. Either way a couple of years later Michelle was in for a nasty shock.

With tears of joy Michelle took the keys from the real estate agent and opened the door of her new house. For two happy years Michelle enjoyed her home. It was no longer just a house to Michelle it was her home. She made a great emotional investment in it. She spent every spare moment she had working on the house. It was her pride and joy and it was a safe place to bring up her young son.

In June 2007 Michelle received a letter informing her that her mortgage rate was to be reset to a much higher rate. Her monthly payments went up by $300. Like so many other people she was stunned. She was not expecting such a large increase in payments but due to her poor credit history she was charged a higher rate.

To make matters worse she was already behind on another loan and was getting letters from the bank about it. She did have a small amount of savings but this was simply eaten up by trying to meet the new higher mortgage repayments. It wasn’t long before Michelle fell behind in her mortgage payments. Her situation got so bad that in November last year her home was foreclosed. Michelle was devastated.

Michelle’s story is similar to so many other stories of foreclosure. All that Michelle wanted was a home that she could raise her son in and enjoy life. She had a dream and that dream was home ownership. In reality what she got was a nightmare.

What are the lessons to be learnt? Hindsight is always 20/20 and people can always tell you what you should have done after the event has happened. However there is value to be had from learning about other people’s mistakes. There were a couple of obvious mistakes that Michelle made that could have been avoided.

The biggest mistake Michelle made and probably the single most important thing she could have done was to learn more about her mortgage and about personal finance in general. It doesn’t matter what state your finances are currently in, the more you learn about personal finances the quicker you will solve your financial problems. Financial education is the single most important thing that you can obtain. If you have any spare cash invest it in yourself and in your financial education. You need to know as much about personal finance as possible so that you won’t be taken for a ride.

In Michelle’s situation it was not properly explained to her about the rate reset but whose fault was that? Was it the mortgage brokers? Or was it Michelle’s for not knowing enough about mortgages to ask the question?

In reality Michelle should never have been approved for the loan. The lenders were too easy with the credit and in a lot of ways the banks and financial institutions have no one to blame for their current problems only themselves. But that’s not the point. The point is Michelle was given a loan she clearly should not have qualified for. This was unfair on her. She was given the dream only for it to be snatched from her two years later.

The housing market for people like Michelle was one giant Ponzi scheme. Michelle just happened to be a willing victim. I know some of you reading this will say ‘good enough for her’ but I think you are missing the point. Michelle wanted the dream of a nice home in a nice area and a secure future. Don’t we all want something like that? Who is to say that we might not be next?