Deciding to purchase a home is a major decision. The price of the home is not usually what the buyer actually pays out, because many people get a loan, called a mortgage, when they buy property. The mortgage payment includes a portion of the cost of the home, as well as interest on the loan. People hope their houses will increase in value over time, so when they are ready to leave it, they will make enough profit on the sale to both pay off the mortgage and have some cash left over as a profit. Previously, families or individuals could not get a mortgage if they did not have excellent credit, at least 20% down, and poof of income or assets. The rules got a bit “looser” in early 2000, and lenders seemed to make it easier to borrow money, even to borrowers less capable of paying back their loans. Sometimes, it doesn’t work out as planned. Today, we’ll talk about what happens when the “American dream” of buying a home turns out to be nightmare.

Step 1: Distribute vocabulary sheet to students. 

Distribute the student copy first, and have class fill in the definitions in their own words.  Compare answers, as a class, to teach copy, provided. As an alternative, the teacher copy could be used a study guide.  Words that are less familiar to students should be reinforced during instruction.

Step 2:

Once students have demonstrated an understanding of the vocabulary words, explain to students that while many who apply for mortgages are able to keep up with payments, without incident, there are instances when the buyer of a home can’t afford to keep up the payments. 

If a home is not paid for, banks are to notify residents that they will lose their homes, and staff at the bank is to review each file to confirm that they are entitled to foreclose.

Review the NewHour Extra Article "Foreclosure Crisis Affects More Americans."

Ask the class to come up with a reason why someone would miss their payments, or be unable to afford a full payment.  Some possible responses include:

• Loss of a job
• A need to take a lower paying job or part time job due to family responsibilities.
• Increase in family size
• Unexpected home-related expenses, such as maintenance, taxes, homeowner’s association fees, utilities
• Loss of benefits, such as health insurance, due to the loss or “scaling back” of a full time position.
• An “arm” or a balloon payment, meaning that the loan the individual or family was granted asked for small payments in the beginning, but larger payments later.
• Unsuspecting buyers assuming a mortgage for which they were preapproved meant that they could afford to spend up to that amount on the home.
• Illness or a disability that prevents the buyer from working.
• The death of, or separation from, a person with whom you planned to share expenses.
• Lack of understanding of the terms of the loan, such as how much money they would actually have to pay back (see Step 6)

Step 3:

 Have students think about what town they’d like to live in as 30-year olds, and what they’d like to do.  Ask them to think about how much education they would need after high school to fill this position, and whether or not they’d have to pay that tuition off with a student loan.

Have students visit: www.salary.com, and enter the name of their chosen career, and a hometown.  Foe example, a certified nurse anesthetist in Little Rock, AK, with a Master’s Degree makes about $140,00 per year.  The same career pays about $185,000 per year in New York City, but the properties would be much more expensive.  Ask students to think about, or research, how much education is expected of someone in their field.  They’ll be expected to fold this information in a lesson.

Step 4:

Once students have a selected a profession and location, they can estimate their salary.   Students should complete the worksheet “How Much House Can You Afford?”  This can be completed for homework.  The worksheet also asks students to estimate other expenses, such a car payment, and student loans. 

Teachers can this opportunity to discuss related economic issues, such as:

• Those with an advanced degree are likely to earn four times more than those without a high school diploma.
• In 2007, 33% of young women 2 to 29 had a bachelor’s degree, compared to 26 % of men in the same age group.
• The average American completes college in 5.6 years.

Source: http://www.census.gov/schools/census_for_teens/educational_attainment.html

Step 5: Once students have calculated what their homes will cost, show students the following video about home foreclosure.  Before viewing the video, ask students to think about what they would save if they could grab one object in their home before it was destroyed.  The people who lost their homes due to foreclosure may have lacked the resources to move their belongings, lacked a place to store them, or may have been to depressed to care.  Ask students to consider how much is lost, besides a house, when a home is no longer yours.

Consider this quote: "I have pick up their children's toys. I mean, I pick up dolls and I wonder, I wonder if this was a little girl's best friend. I wonder what this was to somebody else. And now it's going in the dumpster." - Foreclosed home cleaner

http://www.pbs.org/newshour/extra/video/blog/2008/10/what_really_happens_in_a_forec.html

Step 6:

There are ways to avoid being a victim of the foreclosure crisis, and one way it have what is called “financial literacy” and truly understand the terms of a loan, before you agree to take it on.  This means that you have the skills and knowledge to make sound financial decisions. 

One way that banks got the attention of homebuyers was to offer low interest rates, on paper, and then charge them a higher rate of interest as they paid of their loan.  How could they do this? There is more than one kind of interest, and many people don’t understand the difference. 

If you put money in the bank, such as $100, and the bank offers to pay you 5% interest for keeping your money there, you could have $105, but when you receive that 5% is called compounding, and the terms of your loan, or an investment should specify when interest in compounded. If it is your money, and the interest is compounded daily, you’d have $105 the second day, and the third day, $105 + 5% of $105. The fourth day, you would continue to earn interest on your interest.

Banks report 2 interest rates, for this reason, because one number is the Annual Percentage Rate (APR), and the other is the Annual Percentage Rate Yield  (APY), which is the amount you pay over the year, once the interest is compounded, so this higher number, a truer number, takes into account that you will be paying interest on your debt, which is recalculated monthly, quarterly, or semi-annually.  If you are not making payments, or are only paying off the interest on your mortgage, not the principle, you are not paying off your home, you are paying off your loan.  This is when homeowners fail to build up equity in the homes that have been paying on for years. In other words, they own very little to none of their actual house.  This is especially frustrating if the value of the house decreases as you are paying into it.  This is known as being "underwater".

Direct students to read:

APR and APY: Why Your Bank Hopes You Can’t Tell The Difference

1) Discuss as a class, or journal, about whether or not the bank has a responsibility to make sure you understand all aspects of a loan, and why they would be motivated to offer a larger loan to a client than they could easily afford.

2) Another option during a foreclosure is to “not move” and engage the bank in a legal battle.  Many people who are in financial trouble are unaware of their rights, and accept that a procedure was done legally, but paperwork could have been “pushed through”.  Loans are sometimes sold to other companies, and in the transition, records could be lost. 

Consider this quote as a journal writing prompt or discussion topic:

They become protagonists in their own drama and in the drama of other people. And that transformation of people kind of taking leadership who come in so -- feeling so compressed, that is an energizing thing. That's a -- it's an incredibly powerful thing.

See how on group in Boston empowers homeowners “not to be moved,” http://www.pbs.org/newshour/bb/business/july-dec10/foreclosures_10-19.html.