This is my column for last week from the Arizona Republic (permanent link).
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.
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Northville Real Estate Agent says:
Greg,
The exact same thing is going on here in Michigan, in fact now “stated income” borrowers have to put down 30% in order to qualify for a mortgage. Either you start showing substantial income on your tax returns in order to qualify or you have to put enough down to insure you won’t foreclose on the property.
July 17, 2008 — 6:48 pm
Jeff in Hawaii says:
Greg –
I couldn’t agree any more. You are right on with everything in this post!! So many buyers lied about their income knowing darn well they couldn’t afford the mortgage or were at the very least stretching their limits. Everybody thought this party was going to go on for ever. Don’t people learn from the past? The same thing happened 10 -15 years ago.
Well I hope they will learn this next go around because history does repeat itself.
You seem to know your market and the real estate business.
Aloha
Jeff
July 17, 2008 — 8:59 pm
Foreclosure Doctor Online says:
Great post! Hopefully the situation in Phoenix will improve with investors, new-comers and second-home bargain-hunters. These foreclosed homes can be quite a good opportunity for them.
July 21, 2008 — 9:32 am