|
Remember when a 20% down payment was expected when purchasing a house. Sometimes with stellar credit and maybe a special situation, like a first-time home buyer, you could get in with a 10% down payment. I recall a few weeks after my wife and I purchased our first home - both cars broke down. Saving for your first home is one of the few times, from a financial perspective, that both husband and wife are clearly on the same page. Everything takes a back seat to saving for that down payment - shoe shopping, night out with the boys, everything. That’s exactly why both of our cars broke down. We had neglected maintaining the cars and everything else while saving for our down payment. Obviously once a homeowner, whatever is necessary to keep the house - like making timely mortgage payments will be a priority. After all, significant sacrifices were made and no one would want to lose the home foolishly. So, the bankers have us where they want us. Committed customers who pay their obligations for the most part on time. Well the greedy little bankers knew that they were missing out on a large opportunity with such tight restrictions. There is a large pool of people who do not have good credit, a secure job or money for a down payment. The bank’s bottom line could be significantly increased by loosen their lending requirements. After all, real estate is an appreciating asset. So, even if the number of foreclosures increase the bank would would still make good by selling the house. Does the above sound like an exaggeration? It is and it isn’t. Banks have always loaned to people without pristine credit histories. However the marketing of such loans, known as subprime loans, increased significantly around in the mid-90s. According to the Mortgage Bankers Association, subprime loans represented 14% of the total mortgage market by 2003. In the period 1994 to 2003, subprime loan growth significantly outpaced prime loan growth with a 25% rate of growth according to a report in USA Today (Subprime loan market grows despite troubles, December, 2004). These loans helped drive US home ownership to its all-time peak in the fourth quarter of 2004. Well guess what - the chickens are coming home to roost. By late in 2006, the rate of subprime loan delinquencies of over 60 days was up to nearly 8% according to UBS. The Center for Responsible Lending (CRL) projects that nearly 20% of subprime loans made in the period 2005 to 2006 will fail. The New York Times stated that “about 2.2 million borrowers who took out sub-prime loans from 1998 to 2006 are likely to lose their homes”. One of my favorite commentators, Peter Schiff, believes the the NY Times estimate are too optimistic. He says:
I knew that there were some crazy loan products available, but check this out:
What a joke - 96% of your income will go to servicing your mortgage. I hope that Johnny doesn’t need a new pair of shoes. These mortgages were designed to be refinanced assuming that homes continued appreciating. That ain’t happening now. So, what does this mean to the average homeowner? I will let Mr. Schiff explain, “failures in the sub-prime loan market will put greater downward pressure on housing by increasing inventory and lowering prices.” In other words, the value of your house is going down and its not stopping for awhile. To prevent this article form being a
complete downer think of it this way. Your home is your domain your
castle - it was not purchased as an investment. It was purchased
for shelter and enjoyment. Any appreciation gained from selling it is an
added bonus. Hey, I tried to end it on an upbeat
CONTACT
INFORMATION Michael Dawson recently said goodbye to a 20-year career in Engineering, Marketing and Sales to focus on living his dream of financial independence as a full-time trader on his on account. He has also established a financial education company, The Time & Money Group, to encourage others to pursue financial freedom and is publisher of the company's blog "Breaking the Shackles of the 9 to 5." His mantra is "Why trade time for money ... when you can have both." The opinions of FSU contributors do not necessarily reflect those of Financial Sense. |
