AgentMortgage

Rash decisions hurting borrowers

Lower early-on payments can be painful in the long run

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We tend to undervalue the future. Nowhere is this tendency stronger than in finance, and nowhere in finance is it stronger than in the mortgage market. Borrowers focus on the monthly payment, because that is today's problem, to the neglect of how much they owe and the future obligations they may face, because those are tomorrow's problems. I have termed this "payment myopia." The system encourages payment myopia. Like all salespeople, loan officers and mortgage brokers sell an alluring present, not a challenging future. Lenders have created instruments that support their efforts by offering reduced payments in the early years at the cost of higher payments and larger balances in later years. The most radical of these was the so-called option ARM, an adjustable-rate mortgage that allowed borrowers to make payments that did not cover the interest for five years -- and in some cases 10 years -- before the hammer fell. Since the crisis erupted in 2007, the default rate ...