I receive daily emails from all sorts of vendors. If anyone wants verification that the housing industry drives our economy, they need only check the inbox of any real estate agent. I receive mail from lenders, home inspectors, home improvement contractors, power washers, insurance agents, movers, electricians, auto dealers, etc. The list goes on and on.
I will be honest. I can not read them all. It is not spam, although I don’t really know everyone that writes. It is email that falls into that grey area of “open if the need is current”.
This morning, I was perusing email and opened one from a lender.
Now, most folks reading the email would be amazed that rates remain do dog gone low. Here it is a full year since that fateful day in September of 08 when the financial world was rocked to the point that John McCain suspended his bid for the White House. Many insiders have been prepared to see the usual spike in rates that accompanies inflation. We have been waiting and waiting and waiting and waiting. I will point out, just like the zealots that camp on a mountain top waiting for the second coming, we sit and wait because WE KNOW that rates have to go up.
This is the only version of a stimulus plan that is left to issue. Every taxpaying American will be issued their own personal money printing machine. The Feds can not possibly keep up with the demand.
Now, I am not a certified economist. I have lived long enough to understand that the example set by the government ….”deficit spending” …………does not work for the average consumer. One of the big factors in the collapse of the housing industry was directly related to people getting loans that they could not afford. People got loans that were not really tied to their ability to repay. Lenders used appraisers that were overwhelmed with the accelerating housing prices and took their best guess at property values. Homes were sold with a value that was what they might be worth if prices continue to rise.
Faced with the rising prices, lenders figured well, the asset is gaining value and it will be worth more the day after we use it as collateral. I can only imagine that some genius decided that with the housing industry soaring, individual income would rise as well.
The lenders pondered how can we make use of the potential income. The lenders pondered how can we snare these people and measure them on what they will earn in two years, three years or five years? The ARM, a program in limited use, was expanded to cover everybody. Lenders could use the “teaser” rate to qualify applicants and then hope that house prices continued to increase or salaries skyrocketed as well.
It takes a lot less income to qualify for a loan at 3% or 4% than it does to qualify at the eventual upwardly mobile rate. Buyers had greater purchasing power. The rate would go up further down the road. They were advised (I promise you that I use that term loosely here) that “don’t worry, the value of homes is rising. When your rate adjusts in a few years, you will have lots of equity and you can just refinance the loan.”
Opps………………………….then the bottom fell out of the housing market and prices crashed!
This is just one area of the country. It is not much different that any other area. Prices crashed. Income did not go up. Jobs are being lost. Those numbers reflect what some folks call Lost Equity.
The process of qualifying borrowers on a low rate in order to increase their buying power is patently wrong. If you qualify them at the rate that a loan will adjust to at the end of the adjustable period, you will reduce their cash out lay for the adjusting period of the loan. Consumers will be in a position to get accustomed to home ownership, save money, pay for initial repairs, etc. during the adjustable period. When the loan reaches the adjustable point, it will be in line with their income at the inception of the loan. If income has remained stagnant, they will not have to move out of their home. If income has risen, they will be better off. This is not rocket science…it is just plain common sense.
Imagine my surprise when I read this …
FHA to $417,000 – 417k to 729k- call for quote but usually 1 point add-on. (to points not rate)
4.50% 2 pts 30 year fixed
5.00% 0 pts 30 year fixed
3.875% 1.75 pts 5/1 ARM – Qualify at Start rate. Great loan for move up buyer.
After everything that has occurred, after TARP, after the crash of the housing industry, after the recession began, after employment figures are down, after damn near everyone in the industry has taken a horrible bath, after all this………lenders continue to use “teaser” opening rate, ARM loans to entice buyers to borrow more than they can afford on their current income.
There ought to be a law . . .