Saturday, December 29, 2007

Looming Mortgage/Credit/Debt/ARM Crisis Was Plainly Visible To Those Who Took Time To Look

I just read a most troubling story on CNN Money. The report stated that top economists were predicting this time last year that the worst of the housing issues were behind us, the market had bottomed out, and that real estate (residential real estate, that is) was going to rebound in 2007.

Now, first off, I do NOT remember seeing reports like that. Perhaps I missed them. What I do know is that anyone who understands the fundamentals of the economy, and knew the house of cards our loan system was built on, could see the housing market ready to come crashing down. Government had been pushing lenders for years to make loans easier to get, to make housing more affordable. So they lenders did just that.

- But at the same time, some really lousy lenders got into the game and made fortunes lending to people who were high risk borrowers and who probably never stood a chance of paying back what they borrowed. Those lenders made out like bandits and collected incredible fees.

- At the same time, some borrowers -- not necessarily high risk -- bought far more home than they could afford, or needed, out of greed, or "keeping up with the Jones," or because they were talked into it by a lender or real estate agent.

- At the same time, some investors bought houses to flip without understanding the market. They took out no documentation, no money down loans because they were convinced the market would continue to boom. But they never looked at the market. All the signs were there to show it was going to crash very soon.

- At the same time, virtually EVERY one of these borrowers across all categories signed on for adjustable rate mortgages, ARMs. The problem is, the lower than market interest rate ARMs all were good for three to four years, after which the rates would be adjusted upward. "But that's no problem, Mr. and Mrs. Smith, you'll be doing even better by then, right?" the lender would say just before closing. During that time, Mr. and Mrs Smith frequently (not always) put new furniture and new cars on credit. Now, the Smith's are facing mortgages that are going to jump, as their scheduled interest rates spike.

Folks, this has been coming for several years now. I have talked about this issue hitting us all in the face with other agents and lenders for nearly three years now. For people to say "no one saw it coming" is a flat-out falsehood.

Another reason why I prefer investment real estate -- TO HOLD FOR INCOME, TAX BREAKS, AND INDEFINITELY DEFERRED CAPITAL GAINS, and NOT TO FLIP.

End of rant.

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