Monday, October 27, 2008

LESSONS LEARNED BY HOMEOWNERS IN THE GREAT MORTGAGE CRISIS OF 2008

What have American homeowners learned from the Great Mortgage Crisis of 2008, which rapidly has developed into a housing recession and international economic downturn?

First, greedy, dishonest mortgage brokers and those slippery Wall Street investment bankers who packaged sub-prime loans into mortgage-backed securities and peddled them to investors need to be heavily regulated in the future, government experts say.

And, some critics believe they need to be penalized with jail time, not a slap on the wrist, so this disaster never happens again.

Naïve borrowers need to understand that there is no free lunch in mortgage land. If the mortgage deal seems too good to be true—like zero interest, and no money down—it likely is.

Also, the clever people who draft mortgage documents filled with legal jargon and designed read like a message encoded by the CIA do it on purpose. They know that Joe Borrower, the average American home buyer or homeowner trying to refinance, likely will not read the fine print.

And, the younger the borrower, the less likely he or she will invest the 10 or 15 minutes necessary to read the home-loan docs.

A recent study by the National Endowment for the Arts revealed that young adults age 25 to 34 years spend the least time reading of any age group—only nine minutes a day, and 11 minutes on weekends. And this is a prime first-time buyer age group.

Meanwhile, people age 65 and older read an average of 50 minutes a day, and 67 minutes on weekends. However, senior citizens have their own problem—often they are too trusting of salesmen and authority figures.

Two decades ago, if you wanted a mortgage to finance the purchase of a home you simply made an appointment to meet your banker, who asked you to fill out an application, checked your employment and financial information, asked if you had a 20-percent down payment. If your numbers qualified, the lender usually looked you in the eye and if he liked what he saw he issued a 30-year fixed-rate mortgage.

However, in the modern go-go, “no-doc” mortgage market, a borrower didn’t have to document finances, didn’t need to bother with a down payment and likely would never meet the banker face to face.

The mortgage broker handed the borrower a loan commitment for a 3-year or 5-year adjustable-rate mortgage, that would be adjusted later based on changing global interest rates.

The loan was packaged and blended with hundreds of other loans into a mortgage-backed security and sold to an investor, and the borrower made the monthly payment to a loan service company, who distributed the interest payments to the investors.

In the future, it is likely that borrowers will be much more heavily scrutinized by lenders, and their credit score will likely have to be above 700 points, or no loan will be granted. It is likely that a 20-percent down payment—a whopping $80,000—would be requested to buy a $400,000 condo.

The loan of choice likely will be a conventional fixed-rate 15-year or 30-year mortgage, which holds few surprises for the borrower. If the 30-year home-loan borrower is frugal and pays one extra mortgage payment each year, he or she could own that home or condo in only 18 years and host a “mortgage burning party” like the good old days.

However, those new college grads who load up on credit-card debt, and squander their cash on fast cars and fancy Armani suits may be renting an apartment for several years.

And, it is likely that in this harsh new world of housing finance, every young couple may not be blessed with privilege of homeownership—the American Dream—until they earn it.