Real Estate Investors be advised. The US housing market may be in for another mortgage crisis on the level of that ten years ago. Or maybe not. Different sources claim different opinions, and both deserve exploration. So, without further ado: The 2017 (Or Not) Mortgage Bubble.
A History Lesson
A number of financial factors caused the infamous 2008 Housing Crisis in the United States. The greatest cause of this result fell under the category of lender irresponsibility. Lenders handed out mortgages to almost anyone who filled out an application, disregarding the collection of documentation that certified individual income. This afforded more people than ever the opportunity to purchase a house. The borrowers were distributed teaser rates, marketed as loans with simple refinancing options.
However, this was not the case. Like many phone companies with their nickel and dime fees, the banks were hiking up the interest rates long before investors had an opportunity to refinance. Combined with Jimmy Carter’s housing policies, the natural consequence were inevitable. People were unable to modify or pay off their mortgages, homes were repossessed, and the sudden boost in the economy shattered with the fall.
Banks have again begun giving loans to those with low to no credit rating to increase the housing buy and sell market. Companies like Fannie Mae and Freddie Mac created programs aiming at new real estate investors which allow them to purchase with as little as 3% down. This plan is coupled with the use of alternative credit rating requirements to make buyers more eligible. Therefore, it is easy to see why this operation makes some investors nervous, since it mirrors previous habits displayed before the crash.
Not a Bubble. Probably.
After ten years, though, it seems the government learned a trick or two from their past mistakes. Following the crisis, the United States passed government regulation Dodd-Frank which prohibited the use of negative amortization and the ballooning of payments put in place by the banks. This allowed borrowers the chance to receive a fixed rate on their interest payments. Due to this regulation, banks once again upped their standard of credit score requirements for potential investors. This aids in the generation of an overall steadier market.
Therefore, the use of alternative credit ratings is merely to allow those without a traditional rating the chance to begin their life. Documentation of income is now required for the purchase of a home and the interest rates are being closely regulated by the Dodd-Frank Act to help keep the market in check.
So, is the national mortgage economy in danger of another borderline-apocalyptic recession? Probably not in the short term. However, potential real estate investors need to look into the individual economies of the regions in which they plan to purchase, avoid debt (and in particular avoid ARM’s). Policy makers need to shift their thinking and start viewing liabilities as just that – liabilities that endanger the economic future of the debtor, and the asset stability of the lender. Both of these changes will lead to greater stability in real estate markets, leading to safer and more prosperous lives for everyone.