When offered a chance to realize the dream of owning a home, some people will sign just about any deal a lender places before them.
Combine that eagerness with aggressive lenders ready to provide high-interest loans to less-qualified borrowers and you have a recipe for disaster.
In Gloucester, foreclosures on homes are soaring, with 64 foreclosure filings last year compared to 36 in 2005, an increase of nearly 78 percent. Petitions for foreclosure - the lender's first step in recapturing a property from a delinquent borrower - are also up sharply. Clearly, a weak economy and sagging home values are putting pressure on borrowers to sign on to loans they cannot afford.
The loss of a home to foreclosure is a personal and financial tragedy. There are calls for legislators to "do something" - to bail borrowers out of foreclosures, to rewrite the rules for lenders, to punish "predatory" lenders.
As with any call for legislative action, we must take care that the solution is not worse than the problem itself. Legislative curbs on lending practices that might be welcome today may stifle growth when the market begins to recover.
Indeed, there are lenders who practices can be called "predatory." These are not local banks but often national mortgage companies and brokers of dubious reputation. We've had local reports of borrowers signing mortgage contracts on which the interest rate was not filled in, borrowers believing they were signing up for one mortgage only to learn later they had two, lenders basing loans for multifamily homes on unrealistic estimates of rents. Borrowers promised fixed-rate loans have been forced into costly, adjustable-rate mortgages.
Sensible legislation would put an end to such abuses.
But there is a responsibility on the part of borrowers as well.
Those who sign agreements that commit them to the repayment of hundreds of thousands of dollars over 30 years or more need to understand what they are signing. Buyer education is crucial. Potential borrowers must understand the basics of how mortgages work.
Borrowers must learn that payments in the first several years of a loan are largely interest and are building little equity. Loans that require little or no down payments give them scant cushioning against a change in employment status or a declining real estate market.
Combine that eagerness with aggressive lenders ready to provide high-interest loans to less-qualified borrowers and you have a recipe for disaster.
In Gloucester, foreclosures on homes are soaring, with 64 foreclosure filings last year compared to 36 in 2005, an increase of nearly 78 percent. Petitions for foreclosure - the lender's first step in recapturing a property from a delinquent borrower - are also up sharply. Clearly, a weak economy and sagging home values are putting pressure on borrowers to sign on to loans they cannot afford.
The loss of a home to foreclosure is a personal and financial tragedy. There are calls for legislators to "do something" - to bail borrowers out of foreclosures, to rewrite the rules for lenders, to punish "predatory" lenders.
As with any call for legislative action, we must take care that the solution is not worse than the problem itself. Legislative curbs on lending practices that might be welcome today may stifle growth when the market begins to recover.
Indeed, there are lenders who practices can be called "predatory." These are not local banks but often national mortgage companies and brokers of dubious reputation. We've had local reports of borrowers signing mortgage contracts on which the interest rate was not filled in, borrowers believing they were signing up for one mortgage only to learn later they had two, lenders basing loans for multifamily homes on unrealistic estimates of rents. Borrowers promised fixed-rate loans have been forced into costly, adjustable-rate mortgages.
Sensible legislation would put an end to such abuses.
But there is a responsibility on the part of borrowers as well.
Those who sign agreements that commit them to the repayment of hundreds of thousands of dollars over 30 years or more need to understand what they are signing. Buyer education is crucial. Potential borrowers must understand the basics of how mortgages work.
Borrowers must learn that payments in the first several years of a loan are largely interest and are building little equity. Loans that require little or no down payments give them scant cushioning against a change in employment status or a declining real estate market.
Borrowers must learn that the low initial rates of adjustable-rate mortgages can move higher quickly, leaving borrowers with payments that are unaffordable.
And borrowers must understand that their own credit histories may not allow them to qualify for the best rates.
A mortgage is a two-way commitment - an offer of money at interest combined with a promise to repay. The system only works when both parties deal fairly and honestly with a full understanding of the commitment being made.
