Keeping Your Piece of the American Dream

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.