Monday, October 29, 2007

Financial Illiteracy Hits “HOME”

These days it is virtually impossible to open a newspaper or listen to a media report without encountering comments about the ongoing mortgage crisis which is roiling our financial markets. Mortgage companies by the hundreds are vanishing, major institutions are reporting billions in losses, thousands of good people are losing their homes to foreclosures and high profile executives dismissed on what seems like a daily basis.

The commentators and editorialists are busily conducting their customary hunt for those deemed responsible for this state of affairs. All the while, they pontificate about the evils of sub-prime finance and the sales tactics which led regular people to assume financial obligations beyond their means. “Wall Street”, mortgage brokers, bond syndicators and regulators have all been singled out for a share of blame for the current debacle.

But what of the victims, the innocent homeowners who took on loans they could not service? Enticed by low teaser rates and minimal monthly payments in the early years of long term mortgages they signed on to risky loan agreements in droves and are now suffering undeniable financial and personal pain. Should they have been more cognizant of the risks they were assuming?

Everyone is accustomed to seeing easy terms and low monthly payments for consumer goods and automobiles. “Buying the low payment”, even without considering the term of the contract or true cost of the deal is frequently the most important factor in the car purchase decision.

All of us would like to obtain some items which might be beyond our means and, after all, how badly can we be hurt by paying a bit too much for a car or expensive electronics system by paying an affordable amount on a monthly basis even if the total outlay makes the transaction less than a bargain? The answer is that while we can be out of pocket for an extra year or so there won’t be fatal financial consequences so long as we keep up the payments.

On the other hand, fatal financial consequences can ensue very quickly when this mindset is applied to the purchase of a $400,000+ house where the 2/28 loan agreement requires the monthly payments to nearly double after the first two years as the rate resets and the loan principal increases to accommodate the cost of the below market interest rate for the initial 24 months.

Slick sales presentations, easy credit and lax regulation are a significant part of the problem here but our first line of defense is ourselves and our financial literacy. Understanding compound interest, the mechanics of a loan agreement and the applicable mortgage tables are vital skills which all of us need to survive the financial realities of the 21st century. A failure to understand the principle financial elements of the mortgage and credit card contracts we enter can be extraordinarily expensive if subsequent events result in foreclosure, bankruptcy or even a reduced credit rating.

As the world becomes more complex and paternal corporations go the way of the dinosaur, financial literacy is becoming more and more important as illustrated by the current upset. Even those not involved have to be wary of their respective futures as the promise of social security is less certain, health care costs are soaring and pensions are moving to extinction for non-government workers.

These undeniable social trends heap more and more responsibility upon the individual to prepare, plan and execute an affordable lifestyle strategy as well as an equally important retirement plan. Financial literacy is rapidly becoming something we cannot afford to be without, yet the public schools do not address these skills.

All the writing and mathematical skills and abilities, carefully taught and absorbed over an educational career, will not allow today’s young adult to recognize the importance of early retirement planning, personal finance, credit card management and the elements of the myriad mortgage contracts available today without specific financial training.

The lack of financial literacy training in the prevailing educational systems is as serious a deficiency as can be imaginable. False financial moves early in life involving student loans, credit cards or other instruments can haunt young people for the rest of their lives through large debt loads and the expensive consequences of a poor credit score.

The public education system must take notice of this hole in their programs and address the matter or many financial lives will continue to be damaged and essentially lost!

Patrick L. Ryan, Esq.
Hopewell Valley Community Bank

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