Recently there's been a cry of "foul" by those outside the lending industry. This call has been directed towards creepy mortgages that are designed solely to make the lender more money. After all, if a lender doesn't make home loans, they don't make any profit, right? But now those greedy lenders are issuing loans that have absolutely no business in the marketplace, they say. Those greedy lenders are contributing to a "housing bubble" that will soon burst, force people out into the streets while the lender gets their collateral back.
Exactly what are "those" lenders doing to receive the ire of experts? Apparently they're guilty of the hideous crime of lending people money so they can own their own home. But the perception has been that certain loans are only designed to make the lender a profit with no regard to the potential problems down the road. I'll give you an example.
There is a family who has been renting an apartment for several years. They've got decent credit, but because their local housing market is white-hot, home prices have gone up, month after month, year after year. In fact, it's so hot that their rent has gone up too. Each year, when their rent renewal comes, they're faced with a higher payment, all while paying their rent on time while the housing industry has been drunk on their own listing booze.
Saving up for a down payment is tough. So lenders came out with low-down payment loan programs to help. It got so tough, that lenders introduced zero down payment loan programs to help. It even got tougher, so lenders introduced zero down payment loan programs with adjustable rate mortgages with artificially low "teaser" rates that will eventually increase, making the home unaffordable for the family. The family can't pay the higher payment, so the lender happily forecloses on the property and sells it to someone else. The foreclosure part is what's gaining attention.
Are foreclosures up? Nationally, nothing to be alarmed about. Locally? There are probably pockets of unfortunate circumstance but there is no national foreclosure crisis. But the combination of "what ifs" is the alarming issue. "What if" home prices decline and people are upside down in their homes. Combine that scenario with a sleazy adjustable mortgage that increases so high that the borrowers can no longer afford the home and suddenly we've got a foreclosure crisis.
Two problems with this scenario. First, lenders don't make money foreclosing on homes, especially when there's little equity to begin with. The very last thing a lender wants is to be sitting on inventory worth $10 million dollars with outstanding loans worth $20 million on them. Makes lenders sick to their stomach. Worse, it puts them out of business.
Secondly, if there is a bursting housing bubble because the economy stinks then interest rates won't go up, they'll go down. Right down with the economy. Doesn't make sense to increase rates while the nations factories are closing and more people are in the Unemployment Line. Not only does it not make sense, it won't happen. "Hey, Dave! Haven't you ever heard of the term "stagflation?" Yeah, I heard of it. Nearly 40 years ago. Ford was President then, I think. You can forget about stagflation with the cronies at the Federal Reserve guiding this ship.
Lenders make money by managing it. If they come up with a loan program then they're pretty sure they'll be paid back. Making loans from a lenders perspective isn't a gamble; it's a business proposition. To hear those rail against lenders for making loans that people can't afford or that they're not paying attention to a "housing bubble" means they don't understand the business. And while they're at it, just ask those renters who have been waiting for years to get into a home what they think of those "creepy" home loans. I'll bet you they'll tell you they love them.
