Economics on the small scale

Tuesday, April 04, 2006

Professor Black brings our attention to this USAToday Article:
For 45 years, Robert and Lorraine Brown have lived in their ranch-style home in Florissant, Mo. One of their four children was even born there. But for the past eight months, the couple have been locked in a sleep-wrecking race to keep up with their rising mortgage bills. They've switched to cheaper phone service, cut back on groceries and sometimes put off ordering medicine.

When they refinanced their home two years ago to pay off some bills, Robert, now 78, was working as a deliveryman. But his employer went out of business last April. Now he and Lorraine, 72, a retired nurse, are both seeking work. The rate on their mortgage has jumped from 7% to 10.5%.

"We were having a hard time meeting bills at the time we refinanced. It seems once you get behind, you do desperate things to catch up, and you never do," says Lorraine, trying to hold back tears. "At the time of the loan, they tell you, 'Well, it may go up, but it's probably going to go down.' You want it to be so, so you believe it."

The article ended with:
The Browns in Missouri also have had a happy ending. The lender, Saxon Mortgage Services in Texas, declined to discuss the Browns' case with USA TODAY last week. But within 24 hours of a call from a reporter, Saxon agreed to give the couple a fixed-rate loan at 7%. "I'm so elated," Lorraine said.

If I did this chart correctly, I'm not seeing much of a reason to go with an ARM in Missouri either now or two years ago; a 7% rate seems on the high side now, more so two years ago, and 10.5% in between seems downright predatory.

Having a USAToday reporter investigating this situation and causing the Mortgage company to backtrack is a stroke of luck equivalent to and as improbable as hitting the lottery.

And they're not out of the woods yet. In their shoes, I think I would investigate Reverse Mortgages, or the possibility of selling their house to move to a smaller condo.


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