When Will the Mortgage Mess Be Over?

By: Jeremy McCluggage C.Ht.

Yesterday on the news a commentator was discussing that mortgage scare was over and that it was time to start investing in the financials again. Tell that to individuals who over paid for property over the past two years who can�t refinance and are destined to loose their homes because of the greediness of Wall Street.

If it is over for Wall Street because no one is holding them accountable, it is not over for the homeowners who will feel this for years to come. The industry just dealt with the sub prime market, yet the other shoe will drop and may create a much larger splash than some poor individuals who should have not gotten into houses in the first place. FHA can and is helping those individuals keep their homes.

There is a larger group of individuals in the country who are paying their bills and making money, have a job and have never been late on one thing in their life that over the next year or two will loose their homes. It is like a sleeping giant that will reek havoc when he does wake.

Many experts would agree that the housing market and the economy that was driven by that market is artificially inflated. Consider the facts for a moment. The creative loan types like the Negative Amortized loans that allowed individuals to pay less than the interest only payment and apply the difference to their principle up to 115% of the value of the value of the house, and interest only loans artificially inflated many real estate markets

Secondly the home equity lines that allowed individuals to borrow as much as 125% of the value of their home at the top of the market potentially artificially inflated the economy. Most individuals transferred their wealth from 401ks and IRAs to home values.

Everyone thought the houses were going to keep going up in value. Builders and Developers built homes and condos as fast as they could buy the land and the property, many times marketing their homes using payments that were based on interest only or even the minimum payment of the negative amortized loans. The average house price blew way beyond what an average family, using a thirty-year fixed mortgage, could afford to pay or refinance into.

People all over the country were getting into homes that where two and three hundred thousand dollars more than they could afford if they had been in a thirty-year fixed mortgage. Many of the home buyers, expecting the prices to continue to climb as they had been climbing thought that the extra money that went towards their principle every month up to 115% of what the house was worth would be no big deal because of appreciation.

If you were to ask a fifth grader of the wisdom of such a loan products such as the Option Arm and the 125% home equity lines, they would tell you it is not so wise, and they do not know what we know about the bond market that is affected as much as the housing market.

The reality of what happened is that these individuals, especially in Florida, Nevada, Boston, and pockets in every city in the Country purchased homes using these creative loan products to buy houses that otherwise using 30 year fixed mortgages would have been way out of their reach.

This artificially inflated the real estate market and created a real estate boom based on a foundation of sand. People then borrowed over 100% on the equity in their homes to invest either in stocks or in more real estate, which perpetuated the same, or just purchased stuff with it which is even worse. So the great economy of the past few years that was driven by the real estate market was a scam from the beginning.

It was hatched and conceived by a few math derivative geniuses in some cubical in the grand investment houses. It was championed by those same investment houses who sold that high-risk mortgage paper as A grade bonds. It was perpetuated by the lenders and by the politicians who turned a blind eye because they benefited from the temporary increase in business and the artificially improved economy.

This house of cards was bound to fall at some point and the idea that it came a surprise to everyone at the top is a bit hard to swallow. It was mentioned earlier that even a child could have seen the result of these types of loan products. Have we gotten so smart that we have blinded ourselves to basic reality?

In the 1990s it was the idea that companies on the Internet did not have to make any profit to be successful, and in the past seven years it is the idea that we can borrow more than a property is worth and the artificial increase in values will be sustainable.

So who should be blamed? Should we let the free market sift it all out? Should the government step in and fix it? Should we ban these creative mortgage products and allow the real estate de-inflation of 60% on some areas that would ensue? Can we handle the stock market disaster this would cause? What legacy are we leaving for our children?

No matter what path is taken, there will not be an easy answer to this challenge ahead of us all. The next two to three years will be challenging yet the main question is, will we learn from the past or will we repeat it with another industry. How many more times can our economy be hit by the stupidity and greed of the few and keep coming back to its former glory? It will be interesting to see in the end.

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