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Tuesday, October 30, 2007

Let's Think Positive

Here is an example of the half truthful, and demoralizing real estate/mortgage news that the media has been spreading. Click here.

Now let me share my thoughts with you on a few of the key issues discussed in the article.
While it is true that overall credit standards have tightened in the mortgage industry, it is important to know why it has happened. Without going into too much detail at this time, the subprime, Alt A, and “exotic” loan products, had a big part in the current real estate/mortgage market that we find ourselves in today. It is important to note though, that today we do have 100% first time homebuyer loans - the difference being that borrowers are required to validate their income and show an effort to pay their bills on time. Lenders don’t ask for "perfect credit" but instead a demonstrated effort to pay on time - indicating that they will more than likely pay back the mortgage they are seeking. Prospective buyers with a proven history of taking out debt and not paying it back will have trouble finding a mortgage in today's environment.

Regarding the sentence: “Lenders not only loosened their standards but also used so-called exotic mortgages, which allowed people of lesser means and weaker credit to buy homes.”
It doesn’t even make sense! The fact that lenders so called “loosened their standards” has nothing to do with “exotic” mortgages. What you need to understand, is that lenders’ standards are based mostly on what risk the investors are willing to take. After funding a mortgage, lenders then bundle similar loans (credit, type of loan, interest rate, Loan-to-value, etc.) and pool them together. These pooled loans are then sold off to investors in the Secondary Markets. Based on this short description, you should understand that lenders’ standards are based on the risks that the investors are willing to take, and their requirements. The reason “exotic” mortgages doesn’t fit into this sentence is due to the fact that they actually had more stringent qualifications than the “normal” loan products (Fixed, ARM’s, Interest Only, etc.). The “exotic” loans required that the customer qualify at the fully amortized payment, and not the teaser rate.

In regards to the article as a whole, I have to say that there are so many more factors to the current real estate/mortgage market, and it’s not as simple as the drive-by-media makes it seem. It’s a combination of the aforementioned reasons and a lot of irresponsible decisions made by consumers that may have used the wrong professionals!

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