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Keeping Your Piece of the American Dream

04/08/07 - 09:11 AM EDT

Terry Savage

The greed moved quickly upstream, as the mortgages were securitized --packaged for sale to larger institutions that would ultimately do two things with the loan. First they kept, or sold, the servicing process, the collection of monthly payments on those loans, which earned significant fees. Then the future income from payments on these loans was packaged and sold to investors, who were eager to get higher interest rates than those currently available on Treasury securities.

The greed spread. The investors knew that these were adjustable-rate mortgages, and would bring an ever-increasing monthly income to them. In some cases, little or no documentation was required – either of borrowers’ income or the purchase prices. The investors never met the borrowers – individuals from small towns and large cities, who were told they could now make affordable payments to own their home.

Awakening to Reality

Very few homeowners read the fine print. Surely, no one read it to them. Very few understood that adjustable rates could translate into much higher monthly payments. In fact, for many homeowners, the monthly payment doubled, either because the unrealistically low "teaser" rates expired, or because the Fed raised interest rates.

Last summer, I heard from a woman in Mississippi who had refinanced her home as part of a divorce. The monthly payment was only about $500. But in just over a year, she was told her payment would jump to more than $900 a month! She couldn't find the original broker. In fact, the mortgage company that the broker worked for was no longer in existence. She was dealing with one of the huge banking institutions now making headlines.

Terry Savage is an expert on personal finance and also appears as a commentator on national television on issues related to investing and the financial markets. Savage's personal finance column in the Chicago Sun-Times is nationally syndicated, and she released her fourth book, The Savage Number: How Much Money Do You Need? in June 2005. Savage was the first woman trader on the Chicago Board Options Exchange and is a registered investment adviser for stocks and futures. A Phi Beta Kappa graduate of the University of Michigan, Savage currently serves as a director of the Chicago Mercantile Exchange Corp. She also has served on the boards of McDonald?s and Pennzoil.

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