I have heard this so many times over the last few years. Everyone wants to know what happened to make their home so underwater and their payments so high now.
Well, there are a few reasons for this and for why it is taking such a long time for us to return to a stable market.
First we saw in 2004-2006 a major jump in home prices. This happened because of a mandate to help everyone own their own home which started in the late 1990’s and continued for many years. They came up with new criteria for banks to use in order to approve loans for homes.
Let me digress for a few minutes and try to explain how the mortgage market works a little.
I am sure that most of you have heard of Fannie Mae and Freddie Mac…these are what is called “the secondary market. “
Banks loan money to people in the form of a note. The banks then takes these loans and bundle them together with other notes and sell them to the secondary market such as Fannie and Freddie in order to get their capital back so that they can loan that money out to more home buyers.
The secondary market(Fannie and Freddie) then sell these off on the open market to groups like 401K’s and pension funds and hedge funds etc..to recoop their funds so that they can buy more notes( or mortgages)
Well then, now that you understand this a little more, the banks get a list from Fannie and Freddie telling them what will be acceptable in order for them to purchase the banks notes. These are the rules that were changed by their overseers in order to put forth their goal of everyone owning their own home.
These rules did away with things that had been common in the market place such as the 20% down payment rule and high credit rating requirement and low debt to income rule.
They replaced these things with government guaranteed (FHA) rules that allowed for things like 80/20 loans where the first was for 80% of the loan and there was a 2nd loan for the other 20% of the loan.
This became the new standard for the market. There were other loan packages that came out as this went forward such as the infamous ARM loan which gave home buyers the opportunity to purchase a home at a low fixed rate and payment for a few years( typically 3,5 or 7 years) and then to have it revert up to a normal loan and payment after that set time period.
Well, it all seemed great until these ARM loans started to adjust upward for those who had bought their home with these loans.
They now found themselves not able to pay this new payment and started to sell off their homes in order to save their credit and get out from under this “bad” deal.
If you count the timing that this started, lets say, you bought your home in 2004 and got an ARM loan under the 80/20 rule, you can see how this started to effect the marketplace around 2007(3 years after they were getting these types of loans).
All of a sudden there was a big increase of the homes on the market and buyers started to become scared of these loans and the possible implications of getting one.
There were of course many other things that were happening at the same time but I chose to give you this explanation since it was the most widely used at the time. There were FHA loans years before this happened and some things were already in place too at that time but this was when it all came together. We in the business call this the…if you have a pulse and can breathe…you get a loan time.
Well, things began to spiral out of control at this time as more and more sellers came to the market and more and more buyers backed off from purchasing, The market started a downward turn and as it did this, home prices went down and as such, many homeowners saw that they began to owe more for their homes than their home was worth in the market. This made it so that homeowners in this problem could no longer sell their homes or afford to pay the new payments so they lost their homes to foreclosure under the contract that they had signed.
After this happened, the federal government, yes the same folks that created this nightmare in the first place, decided that they needed to do something to help to stop the bleeding in the market.
They made new rules for the market and these new rules made it very hard for banks to loan money.( I won’t go into that right now in detail but this is what happened)
As all of this was going on, the market started to lose jobs since they were no longer building so many new homes, Carpenters, electricians, building material folks and the like started to get laid off and as they no longer were spending money on some goods, those people started to get laid off and so on and so on until we get to this today.
Millions of people have lost their homes and many millions have lost their jobs over this and today, it does not seem to be getting much better.
Be assured that this too shall pass. It will take some time, but it will pass.
If you find yourself in this situation, there are a few things that you might be able to do today.
I will be posting often with more information on the market and what programs there are available to help you through this.
In the meantime, please feel free to call or email me if you need help now or have questions that this or any of the other blogs do not cover.
Judi Fiolle # 01291679