July 12, 2008: Don't learn all the wrong lessons about creative mortgages
Arguably, the Phoenix real estate market is in a state of incipient recovery. Will there be more bad news? Certainly. There are still thousands of homes stuck in the foreclosure process. But prices are low enough, by now, that our surplus inventory will be absorbed -- by investors, new-comers and second-home bargain-hunters.
The bad news is that, at the end of all this, we will have learned all the wrong lessons from the real estate market downturn.
Are Adjustable Rate Mortgages a bad thing? People learned to hate the first generation of ARMs, so lenders built in guaranteed flat starter rates, fixed adjustment periods, maximum adjustment caps. But even with all that, ARMs came through the down market with a sullied reputation. With fixed rates still riding so low, ARMs don't make a lot of sense right now, but that doesn't mean they never make sense.
How about stated-income loans? Many of the foreclosed homes in the Valley were bought on stated income. But the problem wasn't the loans, it was the buyers -- who lied about their income -- and the lenders -- who let them get away with it.
Negative-amortization loans were another source of foreclosures, even though the idea behind the loan product itself is perfectly sound -- in an appreciating real estate market.
The problem with all these loan products -- and other "exotics" -- was not the particular loan program. The problem was the profligacy of a surging real estate market -- coupled with the securitization of mortgages.
Everyone acted as if the party would never end, that home prices would continue to rise indefinitely. Still worse, lenders had socialized the risk of their poorly-vetted loans to securities investors. Ultimately, lenders didn't have to care if their loans were properly secured by good credit, steady income and valuable assets.
You can blame the people involved if you want, but don't blame creative mortgage programs. Everything's a trade-off, and it could make sense for you to get a stated neg-am ARM for your next home. But this time around there will be a hefty down payment.
Greg Swann is the designated broker for BloodhoundRealty.com, a full-service Metropolitan Phoenix real estate brokerage. This article originally appeared in the West Valley regional sections of the Arizona Republic.
Spread the word: Click here for a printer-ready version of this column.
Or: Steal this book: I've written over 200 of these real estate columns. They are consistently one of the most popular features on our blogs. Many of them are dated and/or entirely Phoenixocentric. But many others are timeless and generic. If you want to use any of my columns on your weblog or web site, feel free. Three rules: Don't change my text, credit me as the author and give me a link back to http://www.bloodhoundrealty.com/ with appropriate anchor text. Something like this, perhaps:
Am I link-baiting? You bet. The quid pro quo is free content for your site that pulls eyeballs and excites interest.<a href="http://www.bloodhoundrealty.com/" target="_blank"> Phoenix Realtor Greg Swann</a> suggested I share this with you:
