…At least when it’s the banks doing the grading. An informed public keeps the wheels of democracy and capitalism greased. However, financial illiteracy still plagues many in the “middle class.”

Underlining the need for reform in schools, disgruntled and desperate borrowers are turning to the courts for help in an effort which should serve as a warning; and if in doubt, just look south of the border where a wave of socialist reformers have recently been swept into power:

“Across the nation, anger and litigation are growing against the tactics of subprime lenders, who offer easy credit for homes that are turning out to be too expensive for millions of Americans now that mortgage rates are going up.”

The King of Consumption or the Queen of Denial
The recent run up in asset values was largely influenced by the easy money atmosphere which prevailed following the economic downturn in 2001. It’s really just a result of basic supply and demand:

1. Cheap money and loose lending standards flood the housing market with buyers (many of whom were never truly fiscally viable)
2. Multiple bidders compete for limited goods (homes) and prices rise
3. Builders struggle to keep pace, resulting in a supply glut once rates rise and standards tighten

A simple analysis by anyone looking at the loan types these “boom” buyers used, could’ve concluded with confidence just when all this trouble would begin.

Some of the most popular loans during this period were ARM’s. Such mortgages typically have rate adjustments (per terms of the note) based on some index plus prime after a fixed period of time (frequently 2 to 3 years). 2007 is the year during which many homeowners will feel that pinch according to various reports.

Coming to Terms
You could argue that many believed rates would stay low, but this is major folly at best. The simple fact that interest rates were at all-time lows should have given many pause. It wasn’t just laymen who fell into this trap; as the WSJ noted in an article last year; Lenders Try to Keep Mortgage Boom Alive:

“More than $300 billion of ARMs issued to borrowers with good credit will begin resetting over the next two years, according to Lehman Brothers Mortgage Research, with $718 billion more of these loans resetting in 2008 and 2009. An additional $507 billion of ARMs issued to borrowers with poor credit will reset over the next four years.”

This over-exuberance may just be a cultural thing, but the best way for government to impact culture is through our public school system, not with laws and regulations limiting democracy and capitalism.

Back in 2005, it could be argued, that even Greenspan got in on the irrational exuberance:

“Lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately,” he argued at the height of the housing boom.

While Mr. Greenspan may have been right about the ability of lenders, I guess that when a final decision is left to human beings, reason and reality aren’t always the best of friends. It must be said, when enough demand exists for something, you can be sure that some go-getter will be right there looking to make a quick buck; even to the detriment of others.

Strong Minds Break Chains
If you take the loan of your own volition, sign up for the class, the lender has the right and the responsibility to hold you accountable for your financial literacy, or lack thereof. Even with these challenges, we should not be deterred – Demand for things that society agrees are “unhealthy” can be minimized, but only to the extent we successfully use our resources to educate the public. In the end, it’s the responsibility of the individual to make the right choice – it’s society ‘s responsibility to provide access to the tools for making that choice.

“Yet without a well-informed public, our liberty itself is in peril.”
– Thomas Jefferson

Related Resources
- Real Estate Finance In-Depth, a retrospective (.pdf)
- Annenberg Institute for School Reform
- TIME.com: How to Bring Schools Out of the 20th Century
- Federal Reserve | Personal Financial Education
- The Wall Street Journal Classroom Edition
- State of the Nation’s Housing 2006 | Harvard JCHS
- Residential Mortgage Market in 2007 | MBA
- The Fed’s Consumer Handbook on ARMs

[UPDATE - 3.22.07]
Debating government intervention on Kudlow & Company tonight was Robert Reich, former labor secretary under Bill Clinton. The falseness of his heart was abundantly clear; if not outright frightening – especially given the position he held…I suspect this may have had something to do with Hillary’s comments on the mortgage market.

Watch the debate between the Dynamic Duo.

The U.S. government is threatening the financial future of todays youth. Like a group of dis-jointed heroin addicts, our apathetic congress has ignored record budget deficits, America’s spiraling debt and has effectively shunned an entire generation in favor of temporary, quick fixes. This article, Your free financial report card on MSN Money, provides provocative evidence for this thesis. For instance, the future of Social Security, remember that old debate? Liz Pulliam Weston, the author, has compiled some interesting numbers to help you sort through all the political banter surrounding this issue:

The farther out your retirement and the more money you make, the more you may want to discount the estimated benefits on Page 2. (Higher-income workers may see their benefits cut more than lower-income workers, if Congress decides to preserve the safety-net aspect of the retirement system.) What this means:

* If you’re in your 20s, you might not want to include the estimates at all when calculating how much you want to save. If you do include them, figure on getting 25% to 50% of the amounts on Page 2.

* If you’re in your 30s and 40s or make more than six figures annually, you might figure on getting 50% to 75% of the promised benefits.

* In your 50s, figure on receiving 75%.

Liz also explains a very simple and easy way to get a snapshot of personal earnings growth over your entire working life – something the government is actually capable of providing us with. Read this article not only for eye-opening insights into our countries welfare system, but also benefit (or at least find some extra motivation…for you competitive types) by comparing your own finances with others in your demographic. Here’s a sample of the stats for those aged between 60-69:

Enjoy the read and if you’re among the younger generations (you’ve probably heard this before, but) remember, plan your own retirement – don’t be fooled into thinking the government will (or even can) do it for you.

Update (11.07.06):
Another article from the good folks at MSN Money.com to help you see how far behind (or ahead) you are of your peers; Your 20s: See how your wealth measures up

Six months have now passed since I started trying to ‘globalize’ my stock portfolio. Results of this rebalancing have been astounding. Risks involved with foreign stocks are greater, so half of these investments were put in two different ETF’s (Exchange Traded Funds). Here’s a link to a site which is dedicated to this type of investment vehicle; finance.yahoo.com is also a great tool for investment research. Here are my four biggest holdings & their returns to date…I hope this might provide a little motivation to get involved in some of these new emerging markets…but I must add this disclaimer; this had much more to do with luck than any skills I might dream to possess:

Templeton Russia and East European Fund Inc. (TRF)
Date Purchased: 7/29/2005
Cost Basis: $43.89
Annualized Return: 107.6%
6 Month Chart:


Turkish Investment Fund Inc. (TKF)
Date Purchased: 7/29/2005
Cost Basis: $17.76
Annualized Return: 125%
6 Month Chart:

HDFC Bank Ltd. (HDB)
Date Purchased: 10/03/2005
Cost Basis: $54.17
Annualized Return: 25.6%
6 Month Chart:


Cemex SA de CV (CX)
Date Purchased: 10/14/2005
Cost Basis: $47.55
Annualized Return: 135.1%
6 Month Chart: