Mortgage Meltdown?

Insight to Recent Mortgage Headlines

Much has been written recently about problems in the mortgage market. From what I have read, many of the facts reported are true, but in a number of cases the analysis leaves room for improvement. I thought it would be helpful to shed some common sense light on what’s really going on now.

To begin, problems exist in a number of areas of the market, and the causes and cures are varied. One problem areas lies with the mortgage bankers who packaged mortgage pools and sold them to investors who are now experiencing losses on those investments. Another is with homeowners who took out risky mortgages in recent years, and now find themselves dealing with the risks they took on. Most, if not all, of the problems have occurred because interest rates have risen and real estate values have declined in the past 2 years.

Almost all the risky mortgages taken on by consumers contained features that allowed lower payments for a period of time, then payments increased, sometimes beyond the borrowers ability to make them. Compound this with the fact that many of these mortgages were for 90% to 100% of the value of the home. In a rising market, borrowers can bail out by selling the property, but when values decline that escape is closed off, leaving a homeowner with no good choices. If they cannot afford an increased payment, then foreclosure is often the only avenue left.

If these borrowers were mislead or coerced into accepting mortgages they should not have taken, that indeed is unfortunate and there is reason for complaint. However, in many cases the homeowners who took these mortgages were the ones who wanted to buy a home, and they were only able to do it with a risky mortgage. The risk they took may have been high, but it may have been preferable to being closed out of the housing purchase market. That was a personal choice those buyers made.

If there is a common theme it is that all markets have ups and downs, and the downs serve a useful purpose in cleansing the market of ill-advised practices that always creep in during periods of excess. There are already politicians proposing legislation to “fix” the market. My fear is that their actions will hurt more than help. The market is now correcting itself, and, if left alone, will do just that. Some of the proposed legislation will reduce the availability of credit to portions of the market that find it hardest to obtain credit in the first place.

For example, when lenders finance 100% of the purchase price of a home for a buyer who does not have stellar credit and who does not have to verify they have the income to make the payments, common sense suggests they are courting problems. Often the problems don’t surface until something else triggers them, and in the current case it was a down turn in real estate values.

Times like these teach us lessons, most of which are not new, but it’s useful to be reminded of them from time to time.

* Taking excess risk can have negative consequences.
* All markets go up and down, and it’s important to prepare for both eventualities.
* Up markets camouflage imprudent activities that down markets expose, sometimes brutally.
* When seeking advise about real estate and mortgages, its best to look first for someone you trust.
* Understand the pluses and minuses of any choices you make, Know what you are buying.