First, Americans held the strong belief that home values would only continue to rise. 109
Despite a number of finance and economics experts warning of the falsity of that belief and the
impending bust of the so-called housing bubble, many people were unaware, and others lacked
the knowledge to evaluate what that could mean to their personal financial existence. 110
Consequently, borrowers signed mortgages that left them with payments they could barely afford
in the belief that they could always refinance to better terms down the road. 111 People also put
extra income into purchasing additional homes, believing their money would be safer if invested
in real estate than the stock market or a bank. 112 As the subsequent recession proved, the belief in
the durability of the housing market was misplaced. Perhaps with a better financial education,
future generations can avoid repeating the same mistakes.
2. The Difficulty in Comprehending Contracts
Second, some Americans struggle to understand and apply the terms found in financial
contracts. 113 For example, some people could not tell you the interest rate found in their
mortgage contracts. 114 Even those who diligently try to understand such terms, and those trained
to write contracts, have trouble understanding the legal jargon and contractual commitments
being made. 115 Mortgage contracts can be particularly confusing, and there are a range of
available mortgage options. 116 For example, many of the borrowers that entered into adjustable
rate mortgages during the housing boom failed to understand that their payments could rise, 117
and even if they did understand, they were unable to assess the impact that the higher payment
would have on their ability to remain in their home for the long term. 118
109 Dinwoodie, supra note 24, at 194.
The common belief that housing values would continually rise would likely have been less prevalent if more
people had a better understanding of economics. People with a basic knowledge of economics are generally
familiar with the concepts of market cycles and bubbles and are more likely to be skeptical of claims that the
price of anything is guaranteed to rise in perpetuity.
110 Id.; see also Gary Karz, Who Predicted the Global Financial Crisis?, INVESTOR HOME, http://investorhome.com/predicted.htm
(last updated Oct. 14, 2013) (providing a list of fifty-eight individuals who are justified in stating that they warned in advance of the
housing crash and financial crisis); Bruce Bartlett, Who Saw The Housing Bubble Coming?, FORBES (Jan. 2, 2009),
http://www.forbes.com/2008/12/31/housing-bubble-crash-oped-cx_bb_0102bartlett.html (“The current economic crisis is raising
many legitimate questions about the failure of economists and financial analysts to foresee the housing bubble and warn of its
collapse. There were, in fact, many warnings dating back more than seven years--but in the euphoria of rising home prices, no one
listened. As time went by and no crash occurred, many of those doing the warning lost credibility or decided that perhaps they were
wrong and moved on to other issues.”).
111 Dinwoodie, supra note 24, at 196-98.
112 Id. at 193-94; see also Carl Richards, Some Investing Stories Sound Good Until You Analyze Them, N. Y. TIMES (Jul. 29, 2013),
why the younger generation is investing in real estate despite the lessons of the last ten years).
113 Dinwoodie, supra note 24, at 195.
114 FINRA INVESTOR EDUC. FOUND., supra note 12, at 22.
115 Elizabeth Warren on Credit Card ‘Tricks and Traps’ (PBS broadcast Jan. 2, 2009), transcript available at
http://www.pbs.org/now/shows/501/credit-traps.html (“I teach contract law at Harvard Law School and I can’t understand my credit
card contract. I just can’t. It’s not designed to be read.”).
116 Dinwoodie, supra note 24, at 196-98. The chart supra note 83 provides examples of the range of mortgage options.
117 Dinwoodie, supra note 24, at 197-98 (“For instance, many borrowers did not fully comprehend the basic structure of ARMs-- that
the payment rates rise after the two or three years of low, introductory rates end. Of the borrowers that recognized that ARMs
contained adjusting rates, many borrowers had no idea when or how the rates would change. As a result, thousands of ARM borrowers
suffered so-called ‘payment shocks,’ where they were surprised and unprepared for how high the payments became when the rates
adjusted. Many borrowers were also either unaware of or did not understand a number of other issues relating to their mortgages. For
example, many borrowers did not know that their mortgages contained long-term prepayment penalties. Similarly, many borrowers
did not understand the private mortgage insurance that they were required to obtain.”).
118 Id. at 195-96 (“Millions of Americans lacked the fundamental economic instincts and intuition to question whether they could
realistically afford the homes that they purchased that had previously been outside of their range of affordability. A basic knowledge
of the fundamentals of economics and personal finance would have made buyers more skeptical of whether they could realistically
afford many of the homes that were purchased during the housing boom. Many borrowers failed to obey old adages such as ‘there is
no such thing as free money,’ and ‘some things are too good to be true.’ It appears that borrowers overlooked other red flags as well,