Reader comments on Option ARMs

October 31st, 2008 10:48 am by MortgageObserver

In a normal world and in normal times, I would completely agree. Accountability has become a ‘nice idea’ in our culture, but it needs to be brought back. Borrowers who have signed their name to the loan documents stating they would repay, and that the information they provided was accurate should not be allowed to keep their homes.

Lenders who made bad loans should go out of business or be punished financially. Hedge fund executives who blatantly admit they traded bad products and misrepresented that product to their investors when they had a fiduciary responsibility to those people should be stripped of the money they made, and should go to jail.

The bail out package that the American people will pay for should not go to banker’s bonuses either.

Now back to reality.

With the meltdown of the credit market, even good people cannot get loans. Jumbo financing is still uber restrictive. A borrower who makes 500,000 a year is restricted on the amount they can finance (as a percentage of their income) more than a borrower who makes 30,000 a year because of the lack of financing. Homeowners who have been paying their mortgages on time but don’t fit within the guidelines for Fannie Mae or Freddie Mac loans cannot benefit from the new, lower rates and are stuck with rates in the 7-10% range due to lack of credit or adjustable mortgages.

Truck drivers who have a legal write-off due to depreciation and mileage allowances on their tax returns are not able to get loans because while the income is there, their CPA took full advantage of the tax code. Same thing here for small business owners.

True subprime financing (which by the way has a history and a track record of repayment) is all but gone leaving a historical 20% of all borrowers without options for financing unless they can get into an FHA loan (which by recent reports is running a ~12% defaults rate)

So when you take out 20% of the buyers from Subprime financing (that was the percentage that actually paid their bills, it was up over 30% when all the stupid loans came into play) and all the small business owners who can’t buy or refinance, you have probably removed 35-40% of the people who were in the housing market who now can’t get loans. When payments get too high, they default on their homes. Or if they can’t get a loan, they don’t buy a home. That would partially account for skyrocketing inventories.

Next, people who have more than 4 financed properties cannot get financing for investment properties. I’m not talking speculators here, I am talking people who can afford to invest cannot do so further restricting the pool of people who could help us out of the crisis we are in.

All of this adds up to record inventories of homes on the market which means to sell properties, prices have to come down which leads to lower values across the nation. This leads to more people who are underwater on their mortgages and more people will be unable to refinance and may walk away.

Watch next year for falling values to affect property tax revenues and states and counties will begin to whine that they don’t have enough money and need to raise taxes. This hurts everyone who is already struggling.

As for people learning from mistakes and punishment working - in October 1998 the subprime mortgage world was rocked due to some pretty bad projecting and bad loans. ~100 lenders went away within a 3 month time frame.

That was only 8 years before this whole mess started. What caused this one was greed on all sides, and the offloading of risk. If you are going to make a loan, you need to have some accountability to collect on that loan. If you have no risk in the transaction, you tend to only worry about selling the loan, and not having to collect the payments.