Lenders Saw Another Opportunity- Home Equity Loans

Category: Finance, Real Estate.

I went to a very interesting meeting yesterday at which Joe Brown, founder of Milestone Mortgage, who walked us through the start and what he sees as the finish of the current lending crisis.

After the crash of the tech sector and 9- 11, our economy was in a world of hurt. The following comes from notes I took. The Fed started cutting the discount rate and continued cutting until the discount rate came down over 5% over a relatively short period of time. Out came home buyers- they were just about everywhere. What resulted was more people buying homes as the cost of money was less expensive. The cost of money was low and some lenders saw an opportunity that looked too good to be true.

What came next was a gap. Not only were buyers everywhere, but they were driving up the price of homes in many markets around the country. Prices were skyrocketing while wages were relatively stable. In markets where home prices were going up in excess of 25% a year, people who bought homes saw the value of their homes 50% or more higher. Lenders saw another opportunity- home equity loans. Many saw the ease of getting home equity loans as a means to pay off credit card debt or invest in rental property or even buy a boat or a new car for cash.

Builders were putting homes up all over the place. Can you smell what was over the horizon yet? Lenders once again saw a huge opportunity to make money. No job? They started loosening their standards for lending. No savings? No problem!

Need a house? Stated income loans, no money down loans, creative 100% financing, interest only loans, adjustable rate loans, 40 year loans- you name it, someone had it. In 2004, 69% of Americans owned a home. See any problems yet? This was the highest rate of ownership ever. Although mortgage bankers have quite a bit of regulation from federal and state authorities, mortgage brokers had very little oversight. Here is a hint to the first of many problems.

These creative loans, which probably should never have been made, were bundled the loans and sold to investors. If there weren t lenders to provide these loans, the brokers would have no place to go. Although I stated that mortgage brokers aren t very regulated, they were not the only problem. Greed got the best of many people. One really nasty result is someone going to the closing table and finding out that their source of money dried up overnight. Not a lot of people are paying the price.

All of a sudden, certain markets stabilized. The bubble burst. Then they went backwards. Markets in California, Colorado and Florida, Arizona saw housing prices decrease. With houses not worth as much, the creative loans were worth less. Not only did the drop, but they dropped like rocks in some areas. Lenders couldn t sell their bundled loans for the value of the loans.

This was the cause of the collapse and lenders started going out of business. Lenders were selling loans at a loss- they owed money at closing. The media got wind of all of this and made it look like we had a national disaster on our hands. Of the approximately$ 10 trillion of mortgage debt in our country, only a small amount is affected. Enter the truth. Of the 6, 000 buyers who, 000 had bought during this creative lending period, only around 15% were affected by the bad lending practices. No, it isn t.

Is the crisis over? There will be more lenders going under and more foreclosures in many markets. We have low unemployment and strong job growth. However, our economy is very strong. Many economists see the U. Private equity is flowing into the troubled lending industry. S. getting through this difficult period just fine.

Countrywide got a$ 2 billion infusion from Bank of America. That is a very good thing. The Fed is staying out of this except to drop the discount rate slightly. If we got involved in a Federal bail- out like back in the 80s during the S& L crisis, it could lead to inflation, which could lead to a recession. Those with bad credit, little or no income and no savings probably won t be buying houses. So what s up now for borrowers? People who can put 20% or more down and who have good credit will continue to get loans.

Homes will once again be affordable for regular home buyers as well. Markets will correct and investors will go in and start buying" cheap" properties. By the way, just because the media has made the national housing market look like it is in terrible shape, it isn t. Many markets, like Austin and San Antonio, are quite healthy even now and they look to remain so. As a whole, it isn t healthy, but pockets are doing great. What it looks like is that we have another 6- 9 months of problems before many markets turn around. Probably not, but we won t be feeling so much pain.

Will it all be roses after that?

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