Mortgages…Will They Ever Be The Same Again?
March 15th, 2008 Categories: Mortgage News
Out here in San Diego we are approximately 30 months into the housing correction and 6 months into the “credit crunch.” We have seen housing prices correct downward in some areas as much as 20% to 25%. With all the doom and gloom out there in the real estate world, I thought I would interject my two cents into this
whole mortgage crisis.
We all heard the stories of landscapers to grocery clerks buying $800,000 homes! Buyers with 580 credit scores buying a home with no money down.!We all did it… mostly because we were allowed to. Credit became so easy to get it was ridiculous! Gone were the days of “common sense” lending. We were living Greenspan’s famous words… “Irrational exuberance“, but this time it was housing. Housing here in Southern California climbed so high at such a rapid pace, there was a time when we all thought it would never end. And then it did! First the condos, then the new construction, at last we see the foreclosures.
This is a healthy correction, one that is needed if we are to survive as an industry and if we want continued healthy growth in housing. As we shift into a familiar but different approach to lending, we are sure to experience some shrinkage in our industry. No more of these 100% option arm loans, 95% financing without a job, or any of these other silly financing packages.
Sure the jumbo market is a little tight right now, but it will eventually ease. 100% financing will come back, but this time it will really have to make sense. We will all be better off from this necessary but unpleasant cleansing of bad loans. With the raising of the FHA and conforming loan limits this year, it’s a step in the right direction. The modernization of the FHA loan program is sure to prevent something like this from happening again anytime soon.
Sub prime loans as we have known it before is rapidly changing and they themselves are experiencing radical changes in their segment of the industry. This is a business model that was under heavy scrutiny and much to blame for the high default rates. If this segment of our industry is to survive, the sub prime lenders will need to lengthen the introductory rate from 2 years to possibly 5 years, raise credit score minimums, remove or at least lighten up on the prepayment penalties, and exercise better judgment in the underwriting process when approving buyers into these type of loans.
It is natural for us to have selective memories but we have learned a few lessons along the way. What we have again learned is that real estate does not always go up in a straight line without risk and that 5 years is NOT that long of a time away.
Tags: conforming loan limits, FHA loans, Mortgage News, option arms, sub prime loans
