How serious is it? It might actually be less of a problem than previously believed. A Federal Reserve Governor estimates that ARMs, in the eye of the storm, make up only about 8% of the entire home loan market. Relatively small number. Here's a bigger number. In some calculations the lenders could suffer $300 billion or more in losses. But, that's minor when we remember that the recent tech bust ate up around $9 trillion in corporate equity. So, is it more hype than anything else?
It could possibly still get uglier, yes, but nevertheless I'm beginning to consider it merely a correction. As long as it affects only 8% of the whole market, that's all it is. An adjustment. The most aggressive lenders of the past will be either bought out or eliminated through bankruptcy. And the rest will redraw their underwriting guidelines and accept the fact that there are dire perils should you get too hungry.
How did it become such a huge issue? The media and some interest groups certainly jumped on the story with guns blazing and molded it into a major event. That has enticed the politicos in Washington to hold hearings to earn points for their careers. I guess what also fanned the flame was all the earlier talk about the real estate bubble and the mortgage report was easy to tie into that. More or less a continuation of the same. Trouble in the real estate market.
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Provided by:
Esko Kiuru
Mortgage and real estate market commentator
www.BluefoxToday.com - syndicated mortgage and real estate blog
eskokiuru@gmail.com
My cell: 702-499-1006
Esko,
I wouldn't say it's overblown, since there are a lot of people hurting due to this crisis. However, they media has definitely hyped it up a bit. I posted a numerical analysis of the real impact of the subprime meltdown here. Check it out.
Thanks,
Shailesh
I understand your point, Esko, and in the light of just statistics it does have a brighter look. But as Shailesh mentions the human cost is unfortunate. Some are victims of outright bad loans (even criminal in a few cases), some are victims of companies whose leadership overextended to the point of taking the company belly up. Randal is correct, this has happened before, though if memory serves the last major event ended up with a government solution (S&L Scandal as the media dubbed it). It seems this one is showing wider ripples, though. Alt-A and conforming are tightening up programs and LTV's on many of the more popular programs (while expanding access and term on PAO's seems a bit non sequiter).
Like so many things in our world there is a pendulum action that in this case runs between too loose a policy (perhaps what we are backing away from now) and to strict a policy (640+ score, 20% down, all others may apply when they achieve those numbers). The sweet spot is between those nodes, and like a pendulum it is unlikely to stay too long at either of those points once it reaches them.
Thanks for your comments. The human cost is very unfortunate. If I could bring up another point from a different angle.
A recent survey discovered that 34% of homeowners don't know what kind of a mortgage they have. That's a high number. For most people a mortgage is the single largest debt they'll ever have. A serious issue. Shouldn't they know at least the basics of that financial document? When you sign up for a home loan you agree to its terms, one of which is that you'll pay it back, and with that signature comes a responsibility. It appears that many just miss that. Or ignore it. Either way, the end result can be damaging.
Our industry has its share of dishonest members and they should be weeded out. Still, when you take on a major financial obligation like this, doing your homework is essential. If in doubt, call on a competent mortgage professional. It's well worth it.
Esko - I agree, lack of education provided by some mortgage brokers is certainly a major part of this problem. I brought that up in my blog entry One of Three (33%) of Home Owners Don't Know What Kind of Mortgage They Have.
At the same time, somewhere in their past you would that most people would have learned not to sign their name to a legal document until you know what's in it. THis doesn't take responsibilities away from us mortgage brokers, but to some small extent I believe it allows the borrower to be given a portion of the blame.