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.
