eddgillespie said:
Are you guys saying that Fed interest rate manipulations combined with commission driven mortgage brokers may have influenced the market appreciation and may be instrumental in its deflation as well? Makes me wonder whether interaction between aggressive and innovative mortgage marketing and increasing interest rates will bring about adjustment, bust or continued expansion.
Is it possible that whether one calls it a bubble breaking or an adjustment depends on perspective and market segment? Maybe adjustment and bust are different names for the same thing. Or is there a point where adjustment becomes bust?
Let me throw another thought into the matrix-
One assumption that a "bubble burst" is ready to occur is that since so many homes are financed using "exotic" mortgages (All adjustable and offering such features as Interest Only, Neg Am, "Pick your Payment", etc.), that when these mortgages begin to readjust (many, starting in 2007) the adjusted payment will exceed the borrower's ability to service the loan. This becomes problematic when home prices have stabilized or declined: The equity requirement to refi into a similar program no longer exists. (BTW, I am back reviewing (independent contractor) reports for a Bank that offers such programs- I have noticed that their LTV requirement for these loans have dramatically decreased; all that I've seen so far are at 80% or lower). If the equity no longer exists to refi, and the borrower can not afford the adjusted payment, the options are limited as to what can be done, but one option is to either walk-away, or try to sell the house and either break-even or negotiate a short-pay. At a point, if enough of these transactions occur, some threshold will be passed and it will create a "hard landing" (bubble burst).
However, here is an alternative possibility: If a 40 or 50-yr mortgage can be "swapped" for the existing exotic product, the lenders may look at this as the optimal choice/action. What I've read about these products is that they are high in fees and interest, and that the payment is similar to a low interest loan, so as a rule, they are not advantageous to the borrower. However, the key here is that the borrower cannot qualify for anything else. So, if the choice is to have bankruptcy or default on one's credit score vs. signing up for a 50-year mortgage, what is the likely choice?
Advantages to lenders/note-holders are:
1. Eliminates REO activity.
2. Generates new fees.
Advantages to borrowers are:
1. Maintains a low(er) payment, one that is assumed can be met.
2. Protects credit score.
3. Borrower keeps house.
This mortgage can be marketed with the same promise as the exotic programs-
"Look, this loan allows you to keep your payment affordable, protects your credit, and you keep the house. Sure, you will not build-up any equity in the first few years [more like the first 20]
but once the market takes-off again, then you can refi into a 30-yr mortgage and recoup your equity. Yes, I know that was the plan with your interest-only loan, but its not your fault the market went south and the appraiser doesn't believe you and me when we say your house is worth so much more. In any event, the bank will start their foreclosure proceedings within the next 60-days, so I suggest we move quickly on this. And, remember, we can wrap all your fees into your loan, so there will be no out-of-pocket expense. When can you sign?"
What this does in real terms is switches a number of homeowners into something similar to a lessee. But, it does offer an alternative, albeit a costly one, to a borrower who simply cannot afford an increase in their mortgage payment.