Teaching middle school students financial literacy= no subprime crisis

[hkem1]

Perhaps it is too bold of a statement to say that teaching financial literacy could prevent another subprime crisis. But do you think it could help?

I have done a lot of work through my high school years working on improving the money management skills of middle and high school students. I was wondering if people on here think my thesis is crazy.

Disclaimer: I definitely do not know very much about the subprime crisis so if I say something stupid please correct me.

My obviously oversimplified version of what I think (which could be wrong, so if it is please tell me) the subprime crisis is as follows:
People took out mortgages because they felt they could afford teaser rates that were the charged at the beginning of adjustable rate mortgages. These loans were made with the belief that since the price of houses was going to continue to rise, the person could continue to pay the mortgage with the higher adjusted interest rate. Then interest rates rose which lessened demand for houses since less people could afford them. Then the people could no longer afford the mortgage because the price of their house no longer was going up. Then when one house on a block goes into foreclosure it lessens the value of all the houses on the block so they all go into foreclosure.

And then of course there was the whole thing about banks packaging these mortgages and selling them to financial institutions all over the world, which caused more problems.



How close is that to being a decent simplified version of what happened?

Back to my main point though. If we teach financial literacy to students while they are still in school they will be more skeptical consumers and may not fall for the teaser rates.

Does that make sense?

 

[ClintClint]

Gosh, I so admire what you're trying to do !! If you're dealing with middle and high schoolers this vision of the cause and effect may be he way to go. But, the reality of what happened may be a bit too "dark" to inform without painting a very disturbing picture of the human psyche.
The whole inflating and bursting of the bubble evolved as everyone, and I mean everyone, rode a wave of greed, envy, corruption, and political motives. The process was rife with facilitators and enablers greased with fees, commissions, etc. There were no "innocent" parties--even the consumer/borrower has a large responsibilty (though most won't admit their part). Politicians, lenders, real estate "professionals", borrowers, regulators, all had their own motives and every step in the process was manipulated and constructed to protect the myth and facade of ever increasing home prices bailing everyone out.
Now, back to you teaching about it all. The complexity would be alleviated if you peeled back the onion layer by layer. Inspect each player's motives, rewards, and how these were facilitated-- each it's own separate world held in the bubble orbit by disparate forces. Delve into how normally level-headed people can be corrupted by the worst of human emotions and somehow rationalize it to themselves and still deny it to this day. As I said, the reality of the dark side may be a bit more than you want to get into. The "bubble" brought out the worst in all of society. Good, honest, hard working, people succumbed to the animal spirits.

 

[beachmouse]

Where I grew up Junior Achievement was very popular with local school districts. I can remember doing one of their personal finance units in middle school- learn to fill out a 1040EZ, do a month-long stock market simulation game, etc.

Programs - JA integrates materials, training, support

 

[Kurt]

I have always felt financial education should be taught in schools.

 

[scooterbug44]

I think that the recent changes to credit card statements and mortgage documents to make them clearer are a HUGE positive step towards "financial literacy," but that a unit on finance basics would also be good.

Most of financial management is math, a knowledge of history, and common sense - and most do not seem to be able to combine the 3.

 

[30ABandMan]

Dave Ramsey has a really good curriculum available to schools and it is in fact in use by many School Boards.

 

[Matt J]

These loans were made with the belief that since the price of houses was going to continue to rise, the person could continue to pay the mortgage with the higher adjusted interest rate. Then interest rates rose which lessened demand for houses since less people could afford them. Then the people could no longer afford the mortgage because the price of their house no longer was going up.

I'm not picking a fight or trying to be rude, but how does the ability to pay a mortgage relate to the value of the house increasing?

When this all started I worked at SallieMae and there was a huge influx of recently graduated low paid people wanting to buy homes. Many could only qualify based on an ability to put off their loan payments for 5 years (forebear payments). I can't tell you the number of "emergency" letters I personally wrote stating that a borrower had X amount of loans and the ability to postpone payments for X months. I asked someone once as I was typing up the letter why they were going into so much debt (they already had almost 6 figures in student loans). The response:

If I don't buy now the prices will keep going up and I won't be able to afford it in the future, it's an investment.

I then pointed out that accumulating more debt and postponing debt might wipe out their "investment". I was told to shut up and print that letter his mortgage broker was waiting.

Another time I asked if they would prefer a letter stating they could defer payment (deferments are far better than forebearance). They had no idea they could defer, but the options were limited to 36 months and wouldn't work. In fact to qualify for the deferment they had to take on a huge debt like a mortgage. The caller asked me to send the forebearance form since once the mortgage payments (interest only) started they couldn't afford their student loan payment. I asked that if they couldn't afford both now and one was interest only how they would afford both payments when the forebearance time ran out. I also added that by using the full 5 years of forebearance that their current payment would, at minimum, double and that they would have a much harder time paying student loans and a full mortgage payment. The callers response:

I'll be making more money by then, have you finished the letter?

All of this happened in 2000-2001, I'm wondering "Where are they now?!?"

 

[hkem1]

I'm not picking a fight or trying to be rude, but how does the ability to pay a mortgage relate to the value of the house increasing?

This could definitely be wrong, so tell me if it is. But I thought it was that when the borrowers took out the adjustable rate mortgages they planned to later refinance the loans using the expected increase in value of their house to help them qualify for the better loan. So then when the value of the houses stopped going up the borrowers could not refinance and ended up having to pay the much higher interest rate that kicked in on their ARM. Then the house would be foreclosed on because they couldn't afford the mortgage.

Like I said, since I'm only in high school, I have never taken out a mortgage and don't know very much about them. So if what I said is misguided please let me know.

 

[Matt J]

This could definitely be wrong, so tell me if it is. But I thought it was that when the borrowers took out the adjustable rate mortgages they planned to later refinance the loans using the expected increase in value of their house to help them qualify for the better loan. So then when the value of the houses stopped going up the borrowers could not refinance and ended up having to pay the much higher interest rate that kicked in on their ARM. Then the house would be foreclosed on because they couldn't afford the mortgage.

Like I said, since I'm only in high school, I have never taken out a mortgage and don't know very much about them. So if what I said is misguided please let me know.

Now I understand what you were saying. It was the perpetual refinance model that some people got into. I agree, but I don't think it was the only reason and in most cases I think it was probably one of the smaller reasons. Future promotions and career advancement was one and the other was people who had no intention of keeping the home or even living in it a/k/a flippers.

 

[scooterbug44]

IMO here is how you SHOULD get a mortgage. It's a tried and true formula, but feel free to tell me how fuddy-duddy it is and how my money could be working better for me:

1) Borrow what you can afford and buy a house that will suit your needs for 5-10 years. Not what someone is willing to lend you, what you can afford. Renting is not always a bad thing - especially when you are young and single.

2) Get a fixed rate mortgage (20-30 years) w/ no penalties for paying it off early.

3) You should be able to pay 10-20% of the mortgage up front and you should always have 6-9 months worth of back-up reserves.

4) Set up payments you can easily afford at your current salary. If your income increases you can pay it off sooner or buy something bigger WHEN THAT ACTUALLY HAPPENS. Plan for the worst and hope for the best.

5) Pay off more than you are required to each month. Not only does this save you a ton in interest, it gives you a cushion if you have an unexpected expense or income change.

6) Refinance only if it will save you money - and again at a fixed rate.

7) Do not borrow against the house, spend a large amount remodeling it, or take out another large loan unless it is an emergency.

Paint, fabric, and elbow grease can do a lot to transform a house. If it needs massive renovation to make it suit your needs, why did you buy it?

8) The supposed market value of your house means nothing UNLESS YOU SELL IT. What you owe the banks matters 24/7.

9) Debt is a bad thing. It costs you money to owe people money. Have as little of it as possible and pay it off as soon as possible.

10) Ask questions, do your own research, and check the math before signing anything.

11) If it seems too good to be true, it is.