Over the last several years now there has been a severe downturn in the economy that has created opportunity for some and devastation for others. The mortgage market is just one piece of that picture, though a very important one. For years, people saw their home as a "piggy bank" and it often was the only retirement or other savings that they had. Their monthly payments would generally pay off the debt against the home, they would enjoy the tax benefit of home ownership (pay less taxes) and the home would continue to grow in its value. The home was a "piggy bank" in that they could easily pour some of that money back out of the home through refinancing or home equity loans. The money was often used to enrich their lifestyle with items such as a new boat or even to consolidate the boat, truck, motorcycle and credit card money owed into a neat little stack of debt against the big "piggy". Another version of the piggy bank home was the savvy investors who chose to get cash out of their home to invest in the stock market. Still others would simply sell their home at their whim and pay off all of their debt only to start fresh with a home that they could buy with no money out of pocket or no real qualification. In short: the market encouraged us to think that their was not a ceiling on the price homes would appreciate to...and we couldn't lose! There were products available that also helped us to think that buying a home was a
as an member of society here in the good 'ole U.S. of A. In fact, roughly 8 out of 10 people who applied for a loan with me during those "boom" years could be qualified for some form of RESPONSIBLE home finance...with the last two possibly choosing to finance elsewhere with the "questionable" mortgage broker lot.
Unfortunately, all of that came to an end and the "riches" of our homes became liabilities that we owed more on than they were worth. Blaming the mortgage professionals who encouraged "sneaky mortgages" for all of our housing market's ailments is like blaming the soldiers for the war in Iraq. However, the catalyst for the unraveled market certainly may have been in large part due to people giving up on paying their mortgages that maybe they never should have chosen or been encouraged to choose in the first place.
on our part as the general public was accepting the belief that home ownership is a right that should be afforded to everyone regardless of whether they are prepared to accept the responsibility or not.
Without going too far into the reasons for all of the "exotic" mortgages that were available to buyers for a few years, I will share that they were needed to meet a demand for Mortgage Backed Securities. Mortgage Backed Securities or "MBS" are simply little "shares" of a group of mortgages just like "shares of stock" is a portion of ownership of a publicly traded company like Apple. Investments such as stocks and bonds are backed with a promise that you will earn some sort of interest or return. Mortgage Backed Securities are no different and are traditionally offering a reasonable return on your money with minimal risk. (Traditionally, people were putting 20% of their
money into their homes up front!) You are buying mortgage shares. As the borrowers pay their payment, the shares pay a return and everyone is happy. Those who securitize mortgages or actually split them up into shares are referred to as the "agencies" (Fannie Mae, Freddie Mac, Ginny Mae, etc.) The marketplace for the selling of the shares is referred to as the "secondary market". With increasing world wealth and a desire for reasonable returns for minimal risk: DEMAND for MBS went through the roof and the Agencies were having a hard time keeping up with demand. They needed to have more product (MBS) to sell to interested investors. This can be traced to a need for more mortgages to be securitized.
What changed was the rating system. The way the rating of the MBS changed allowed the bond to be offered on mortgage batches that were "
" a good rating BUT there were MANY stinkers in the pile. People wanted a reasonable return on their investment with reasonable risk and had boatloads to invest so the "AAA rated" Mortgage Backed Securities a.k.a. Mortgage Bonds sold like HOT CAKES. In other words, people were buying "AAA" rating but it was really like a burrito wrapped in "AAA" rated loans, but FULL of Garbage and indigestion. With the new rating system, the agencies could offer HIGHER RISK loans and effectively "qualify" a MUCH broader group of people. They were able to offer mortgages with the new products to people who NEVER should have had or would have had a mortgage before or since.
A few years later, the rubber met the road. People stopped making their mortgage payments and in many cases with some of the "no job, no asset verified loans, NEVER made even one payment. That meant that the investors who bought shares of those mortgages unknowingly were not getting paid. They couldn't sell their shares unless they sold them for pennies on the dollar to other investors. The exotic mortgages went away...making the group of people who qualified for a mortgage MUCH smaller. Less people available to be financed meant less people to buy the homes on the market. Less people demanding homes on the market left more homes for sale and degraded their value. Entire developments sat empty because there simply was not enough people qualified to even purchase any of the lots anymore. Example: how many people qualify for a loan that requires zero down payment, no income verification and no assets vs. a loan that requires a down payment of 3% of the purchase price? When homes were devalued, people felt hopeless. Many walked away from homes that they were perfectly qualified for because the home was worth several hundred thousand less than what they bought it for and it was wiser to start over somewhere else. We didn't feel so "RICH" anymore and stopped spending money so readily. This led to less profit reported by many companies and so lower values in the stock market so our 401k's were also devalued often by thousands upon thousands of dollars. What a slump.
Okay, all of this is depressing right? Fortunately, with every misfortune for one, there is a fortune to be made by another. Opportunities abound for people who are interested in exploring this real estate market.
Three opportunities for buyers right now:
1. The feds stepped in and have invested over a trillion dollars in Mortgage Backed Securities over the last 3 years. Agency guidelines have changed making the MBS a very reasonable investment with a decent return. Confidence is UP in the once tarnished investment. This is keeping rates at all time lows. The MBS market will very likely stay strong in the near future but it is stronger NOW than EVER so now is a great time to take them in with mortgage financing.
2. Home prices are starting to level and in some areas are actually marking increases. For the last few years the market has been FLOODED with short sale and foreclosure opportunities. In many markets, the "fire sale" home has actually provided more comparable sales for appraisers to consider than homes sold by people who are making the payments just fine. The fire sale home has decreased the market to a place where it is now starting to go back up...the time to buy is now.
3. The best remain. Now, more than ever: it matters who you do business with. So many of the "fly by night" or part-time realtors and lenders simply haven't made it through this recent cycle of tumult and have decided to hang it up. Many of the professionals that are left are the best out there. Take time to investigate this for yourself and you will find that there are more people interested in helping you right now with sincerity and integrity than ever before.
Good luck in whatever you endeavor. Mortgages have been my life for over a decade and I have been in finance for longer. I have never seen an opportunity like this before and until you are ready, I will be available. Naturally, if you have questions on any of the above or would like to discuss further, please don't hesitate to reach out.
Cheers,
Chad
