Many people are having a hard time paying their mortgages and though some say the borrowers are to be blamed there is another side to the coin.
Years before the creative loan programs came in to play many people worked hard and still could not purchase a house. The lenders required 20 percent down. Many people could not afford the 20 percent down plus closing cost. It was a buyers market then, but hardly anybody could buy. FHA loans were available but some people felt there was too much red tape. FHA did require that borrowers know how to budget, understand the various mortgage options and terms. Average house prices in most places such as Maryland was approximately $155,000.
Private Mortgage Insurance companies were introduced and they also required that borrowers have knowledge of the mortgage options and terms. Private mortgage insurance started to influence the market place. It was offered with conventional loans that started competing with FHA type loans but won easily because it still had less red tape than FHA type loans.
The main requirement was that a borrower should have a minimum FICA credit score of 620. The PMI started moving real estate sales and investors started taken advantage of the buyers market. PMI also went as far as offering that borrowers could put 3 percent down instead of 5 percent down and seller could give closing help of 3 percent. Some PMI allowed the seller to put 6 percent closing help. Those aggressive moves cause real estate sales to go up another notch.
Up to this point appraisal values were creeping up slowly and one could say at a reasonable speed. In the year 2000 more creative loan programs started to jump into the market. Subprime market was now competing with the conventional loan market that had PMI fueling its fire. Subprime was winning easily.
The proper way to purchase a house was that the borrower was supposed to get pre approval for a loan, which would determine the loan amount and determine their purchase price. Subprime loans got rid of that regulation by offering stated income loan with high debt ratios of 55 percent and high loan to values.
Real estate agents were now under pressure to keep their client because houses that were not worth the price from the cost to build factor were not available. Sellers could sell with arrogance. One felt lucky if a contract was gotten. Many times the purchaser had to even clean up the property before they could move in. The fact of the matter from the cost to build factor, all houses were over that factor. Houses went up in value because of the demand that was induced by the subprime money that was available to fund purchases.
There is one thing to keep in mind when it comes to appraisals. Some people believe that an appraised value is based on a house that is comparable to another. This is half true. The real truth of the matter when it comes to an appraised value is “who” is living in the neighborhood that increases the value of most properties. Values are in people and also what some one is willing to pay.
Comparables that appraisers use is a recording of that behavior. In actuality, real estate is no different from art when some one said “beauty is in the heart of the beholder”. With that in mind, the value of real estate went up because the demography was changed financially. Higher income people moved into what was considered low income neighborhoods and turn them into high income neighborhoods.
FHA was now hardly getting any notice. In most cases it was like FHA did not exist. Many people did not want to be bothered with the red tape of FHA and some did not want to be bothered with the low debt ratio requirement of conventional loans. Subprime loans came as the rebel with the cause. The flexibility of the subprime loans was literary putting money in just about everybodies pocket. All they had to do is sign on the dotted line. The high debt ratios, the really high loan to values (100,103,107 and 125 LTV etc.,) and the little or no regulation cause the market to shift to a sellers market. This situation cause FHA to raise their credit score requirement from the 5 hundreds to the 6 hundreds and raise their loan amount to approximately $400,000.00 in some places. This was done because there were complaints that a house could not be bought with an FHA loan because of the low loan amount. Although, FHA increased the amount, it also decreased the people who FHA was intended to help in the first place.
The upper middle class was the only heirs to the new FHA. The irony of the situation is that now FHA has got back to the basic because the upper middle class has the same problems of the lower middle class. It was ridiculous to see and hear the great amount of time and rhethoric for Congress to pass a bill to allow FHA to assist people who are facing foreclosure. When someone is facing foreclosure their credit score drops in most cases to the 5 hundreds. Congress could have saved valuable time by making FHA drop their credit score requirements back to where it was which would be internally fast in order to accommodate these borrowers who found themselves in financial difficulty. If one reviews this summary of the past mortgage history, the answer to the problem is hidden in the history.
At this point all we have to get through this immediate situation is mortgage modification. We have to adjust wants to needs and with time the wound of this financial crisis will heal.
