Sorry to leave such a gap in my blog but I've been off taking care of clients and tending to family responsibilities -- like a broken air conditioner on the warmest weekend of the summer! Now that the a/c is back on it's time to tend to my blog.
Making Me Look Smart
You'd almost think the Wall Street Journal has been reading my blog about the inappropriate and dangerous uses of the latest exotic home mortgage products (see Playing with Mortgage Fire from July 11 and Exotic Mortgages & Hot Real Estate from July 13).
The WSJ featured three prominent articles on this topic in the last two weeks. Unfortunately, these articles are only available by subscription so you'll have to make do with a few quotes and my brief comments about each.
Easy Money: A Mortage Salesman's Pitch
July 20 - Front Page and Page A6
This first article follows the pursuits of a successful loan officer.
"...offering alluring and controversial mortgages that require unusually slim payments for a few years, before bigger sums fall due. Some customers use these loans to borrow as much as seven times their annual income -- a staggering jump from the two-times-annual-income level that was the rule of thumb when the 30-year fixed-rate mortgage was the norm."
"As real estate mania intensifies, the mortgage industry keeps making it easier to borrow. 'Low documentation' loans are catching on, including ones where lenders simply take borrowers' word about their income and don't ask for pay stubs...In the most common twist, lenders aren't requiring even token efforts to repay principal in the early years of a mortgage. Interest-only payments suffice. In some cases, borrowers can even pay less that that, allowing interest to pile up and be repaid later."
I thought I had painted a scary scenario in my earlier posts. Imagine a mortgage where you owe more each month after your payment is made!
As I said before, these mortgage tools can be effective for the right person in the right circumstances. Instead, they are primarily used to fuel lavish lifestyles that can't be supported through current income. In the remaining cases they are misused by people just to scrape by and get into a house -- putting off the day of reckoning for a few years. That day will come and it won't be pretty.
Mortgage Lenders Loosen Standards
July 26 - Page D1 and D2
Just to confirm the market trends, here is a sample from this article. Does the word "bubble" mean anything to anyone out there? (Think tech stocks, late 1990's.)
"Novel loan products have helped fuel much of the run-up [in housing prices], which continues to defy expectations."
"But lenders are making it still easier for borrowers to qualify for a loan...lowering the credit scores needed to qualify for certain loans, increasing the debt loads borrowers can carry, and easing the way for borrowers to get loans while providing little documentation."
"The loosening of standards also shows up as products that were initially geared toward the most sophisticated borrowers [i.e., the right person in the right circumstances] -- such as option ARMs and interest-only loans -- have become more mainstream."
"...interest-only mortgages, which were first aimed at wealthy borrowers, are increasingly being offered to people with poor credit...[and] accounted for 30% of the subprime loans in April."
If this is a bubble, my prayer is that none of you reading this gets caught when it bursts. Even if it isn't a bubble, there is enormous danger in stretching beyond your means, like Lender's Slave did, and suddenly finding yourself in serious financial trouble.
Investors Fret Mortgage Balloons Will Burst
July 27 - Page C1 and C4
This article looks at the flip-side of the picture. What is the situation for those who make loans or invest in the loan companies offering exotic ARMs, interest-only, or less than interest only mortgages? It could get ugly.
Smoke and mirrors. Lenders get to book as profit the full amount owed by the borrower, not the minumum payment that is actually made each month. Hard to believe but true. The lender gets to show a profit on money that it hasn't even collected yet! This makes their income look great now. In addition, the unpaid interest is added onto the lender's loan portfolio and thus gives the appearance of a growing loan portfolio.
Here's the problem. These same lenders have been lowering their standards for new loans (lower credit scores, no documentation of income, etc.). When people can't live up to their obligations and the loans begin to default, then the lenders and their investors get crushed too.
We'll see how it all pans out.
What's Ahead for This Blog
That's all for mortgages right now. I'm ready to move on to other topics in the days ahead. In the coming weeks I will be posting a series of reviews on the book Rich Dad Poor Dad. It is one of the most popular financial books around but is also one of the least understood, especially in Christian circles. You will not want to miss it.
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