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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Peter DuPont says:
Hello Mr. Swann,
I agree with your article about loan products.
As the NRA use to promote, “guns don’t kill people, people kill people”. The mortgage programs were not designed to take advantage of people, but to help them. The unfortunate problem is people (mortgage originators, buyers, sellers, and realtors) took advantage of the situation and guidelines. It did not help that some people who became involved in the real estate industry in the last 5-6 years were poorly trained and taught to treat each person as a transaction and to move on.
Keep up the good work.
Peter DuPont
Mortgage Banker
July 15, 2008 — 11:20 am
Todd Carpenter says:
I think the regular Joe might be surprised to know that the IndyMac was doing Stated Income type at least back into the early 90’s. I originated my first stated loan in 1993. Between then and now, an unprecedented rise in home ownership has blessed this nation and economy.
Looking back a couple years, things look bleak. Looking bask over a couple decades, Americans are way better off, and the cycle of home ownership is firmly entrenched in what used to be the renter’s class.
July 15, 2008 — 2:28 pm
Tom Vanderwell says:
Greg,
Well said. There are lessons to be learned in all of this but those of us with eloquent voices need to make sure that the right lesson is learned.
I’ve only done one “option arm” in my life as a lender but the situation that borrower was in worked perfectly for it.
99% of the borrowers I talk to these days want a fixed rate and that’s not a bad thing, but there are times when other programs do work better.
Tom Vanderwell
July 15, 2008 — 4:16 pm
DJ Swanepoel says:
Thanks for the great post, Greg. You’re right on with the concept that its not the idea that is the problem, its the implementation (or failure to implement a given program correctly) that is the problem.
July 16, 2008 — 1:05 am
Robert Kerr says:
Arguably, the Phoenix real estate market is in a state of incipient recovery.
Wishful thinking, my friend. Looking at the long-term median price trend and pacing forward, Phoenix has at least another 10-15% more downside. That’s at least one more year, perhaps two.
If the impending recession hits your area particularly hard – I think it will based on your economic growth areas since ’04 – add another year or two to that.
Good luck.
July 19, 2008 — 12:48 pm