Turn the housing crisis into a lesson

HEALTHY finances

When I was 10, my grandmother told me about homes in our southwest side neighborhood that were—at one point—selling for just $10,000. Each time she told me that story, she added that she was mad at herself for not having enough money in the bank to take advantage of those low home prices, but that she had been saving since that day. If it ever happened again, she would be ready.

I was so fascinated to hear that homes could sell for so little that I asked my dad to show me what those homes looked like. They were identical to my own. As we drove past the houses that day, I made a promise to myself: Like my grandmother, I would save and be ready when opportunity knocked.

That time is here. But I’m not looking at the current real estate crisis as an opportunity to buy. It’s an opportunity to teach.

Chances are your child has heard about the subprime mortgage crisis but doesn’t understand what’s going on. Chances are you don’t understand either.

In a nutshell, here’s what’s happening. Millions of homeowners, thrilled by the prospect of living the American dream, bought homes they couldn’t afford. They were lured into taking mortgages for 100 percent of the value of the house, in the mistaken belief that real estate values would continue to soar. Or they were duped by unscrupulous lenders who sold them adjustable rate mortgages they could barely afford at the low initial rate, only to find it impossible to pay once the rate adjusted upward and the monthly payment jumped. In still other cases, homeowners saw the value of their homes rise and went back to the bank to refinance to pay for a European vacation or buy a new car.

Then the bottom fell out. Real estate prices declined, leaving many families owing more than their home was worth.

This national crisis provides us with a real life example for driving home some important money lessons.

Saving for a rainy day. If those 2 million families that face the devastating loss of their home had savings to fall back on, perhaps they might not have missed a mortgage payment—a mistake that could disqualify them for the bailout Washington is offering.

Live within your means. Explain to your kids that means you spend less than you bring home in your paycheck. Then tell them that living beyond your means for prolonged periods means you accumulate insurmountable debt and hurt your credit score—the ticket to the less-than-desirable subprime world.

Learn to delay gratification. Many of these now troubled homeowners were forced into the subprime mortgage market because of their own inability to control buying impulses. Learning to delay gratification by saving for those things you covet—whether it’s a European vacation or the down payment for a house—is key to avoiding the carnage of overwhelming debt.

Know what you’re promising. Use the subprime crisis to teach your child how important it is to read and understand the fine print before signing a contract. Whether it’s a mortgage document, class assignment or allowance contract, not understanding the details can have serious ramifications.

Tell your children that millions of people signed a loan deal they either neglected to read or did not understand. Explain how those same people now may lose their homes. Tell them never to agree to do anything if they don’t completely understand what they have agreed to. If someone is pushing them to agree, tell them to push away from the contract and give themselves 24 hours to reflect. Encourage them to seek out advice during that cooling off period, either from a family member or friend they trust. After all of that, if they still don’t understand, walk away. No matter how good the deal sounds.

A good way to introduce your child to signed contracts is through a written allowance contract, signed by both parent and child. It is the first step toward giving them hands-on experience with the power of their signature and how to take personal responsibility for that signature.

Share your mistakes. If this is happening to you, explain how it happened and how you are going to fix it. Don’t miss a payment. Get help now and give your children the best lesson of all: the knowledge that it is possible to survive a money mistake.

Looking for help?

If you have a subprime loan that is due to reset beyond your means, call your service provider now. Your service provider is the company you send your mortgage check to each month. Next, call Hope Now, at (888) 995-HOPE (4673). Mortgage counselors are on call 24 hours a day and advice is available in multiple languages. Visit the FHA online at www.fha.gov.

Susan Beacham is the founder and CEO of Money Savvy Generation, a financial education company that provides innovative products and services to help parents and educators teach children the basic skills of personal finance, www.MoneySavvyGeneration.com. E-mail her at susan@MSGEN.com.

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