Real estate mortgages - history repeats itself
It has been said that history has a way of repeating itself and when it comes to home mortgages this is certainly true.
In the late 70's and ealry 1980 many individuals took out adjustable rate mortgages. Take a look at this Mortgage Rate Chart and you can see what happened to mortgage rates in 1981. The prime rate topped out at 21 1/2% and home mortgages topped out at at 17 1/2%. Needless to say, those with adjustable rate mortgages suffered when rates sky rocketed and homeowners lost their homes by the thousands.
I remember reading the headlines in 1981 and many articles were written about the death of adjustable rate mortgages as we know them. Homeowners vowed they would never make the mistake of taking out another adjustable rate mortgage as they handed over the keys to their homes lost in the foreclosue process.
Fast forward to 2007 and many of the headlines I have read are very similar to those I read in 1981. Yes, history does have a way of repeating itself and unfortunately the worst has yet to be seen in terms of the affect real estate foreclosures will have on the countries financial markets when the dust settles.
Many buyers that purchased homes in 2005 were convinced their homes would continue to appreciate through the roof and were assured they could refinance their homes and opt out of the adjustable rate mortage documents they signed. Problem is that many mortgage loans that were made were to borrowers that "stated" thier income and never would have qualified for a home mortage with traditional mortgage qualification rules.
I am a huge advocate of buyers buying withing thier means and looking at the consequences if things don't go as planned. This means that before buyers signed loan documents for an adjustable rate mortgage they should have asked themselves if they could handle the maximum rate or CAP in the event the loan rate accelerated to the maximum rate. They should also consider loss of jobs, illness, and many other factors that can change in the blink of an eye and dictate whether or not mortage payments can be met.
It is going to take some time for the affects of the current sub-prime meltdown to run it's course. Many experts agree that the affects of the sub-prime meltdown could continue through 2008 and possibly into 2009 in some of the weaker econonomic areas of the country.
My hope is that both mortgage lenders and buyers alike will take a good look at history and realize what is necessary for an individual or a couple to become sound and responsible home buyers. If a buyer cannot reasonably afford a home based on verified incomes, and down payment coupled with a strong credit report they should work on their financial condition and work hard to become responsible homeowners. They should not be given a loan because they have a pulse.
Getting back to sound fundamentals both in the way we handle our money and make financial decisions is the best way to correct a trouble mortgage market.
We will get past this sub-prime mortgage market meltown in the foreseable future. The hard question is "Will history repeat itself in the future or will we learn from history"?