Making sense of the mortgage mess
By Steve Levine
It seems that not a day goes by that we don't hear news report after news report about the so-called "sub-prime" market, and how it is aff ecting the overall economic conditions across the country. Talk of predatory lending abounds and the state government is seeking to pass legislation to stop foreclosures. In some circles, there is even talk of bail-outs for affected homeowners. I thought I would spend this week's column talking a bit about what the issue really is, where its roots lie, how it aff ects the rest of us, and how it will ultimately resolve itself.

The sub-prime market means different things to diff erent people. To most, it refers to consumers who had bad credit who paid unusually high rates to obtain a mortgage. Certainly that is a component, but I tend to broaden my scope to include any non-traditional mortgages - even if they be to clients with immaculate credit. In fact I have found in my travels far more problems with strong credit borrowers who were just over extended

- than issues with marginal credit buyers.

The overall concept remains a simple one. People purchase a property, often on a nonfixed-rate product, and when the rate goes up, they can no longer aff ord the loan payments. In a rising value environment , such consumers usually just put their homes on the market and get out from under the debt. The real crisis occurs when the values are declining and no longer substantiate the outstanding balance on the mortgage. In these scenarios, a consumer is simply trapped. They cannot afford the rapidly escalating monthly payments - nor can they aff ord to sell in today's market conditions. Struggling to keep up with the mortgage payments, and with no equity in the property anyway, many of these homeowners simply let the property go to foreclosure - and everyone loses.

So how did this mess begin? Well, many people are out there blaming the lenders ... as they perhaps they should, but in many cases the consumers bear just as much responsibility or more. The proliferation of the "no doc" loan over the last 20 years, combined with the infamous "100% financing" products stirred together in their evil cauldron, concocting a recipe that could ONLY have resulted in disaster. The thought that a "custom mortgage product" existed for people willing to pay a higher rate to be less than truthful about their income (or who were inaccurate in paying their taxes) is just a bizarre concept.

Predatory lending is clearly the other component, and until the lenders are put on a tighter leash, the problem will never truly go away. For example, I hear these commercials on the radio all the time that use, in my opinion, "trick phrases" to conceal what's actually going on. One of my favorites touts how: "With a mortgage of $1,000,000 your minimum payment will be only $230 a month. That's right, the minimum payment you heard is correct." What these commercials don't bother to tell you is that there is a diff erence between minimum payment and monthly payment. Yes, you could make that "minimum payment" just like you could do on your credit card. The "actual payment" though should be around $6,500 a month ... so if you make the "minimum payment" they are just going to add the $6,270 diff erence to the balance that you owe. Using that math, after a year of making the "minimum payment," you would owe over $1,060,000. After 10 years, you would owe about $1,800,000. This is what's called a "Negative Amortization" product, and has trapped thousands of borrowers in the last year alone. Prices were going down, while their outstanding balance rose. Not exactly a recipe for financial success.

The last component has been the inflation of appraisals that occurred over the last few years. Mortgage lenders, eager to issue lines of credit, equity loans or second mortgages, lent homeowners far more than they should with appraisals that just made no sense. Recently, I saw a small 3BR cape that was worth low $300's. Over the course of three years and multiple loans, the homeowner had been loaned over $450,000. Ultimately, banks with these types of practices either wind up agreeing to a short sale or just owning the property again.

Regardless of the cause, it is the rest of the consumers that are paying the price ... so when people talk of a "state bail-out" I definitely vote a big giant NO. Even now, I hear radio commercial after radio commercial off ering "no doc loans" with 100%+ financing. I ask you, Mr. Mortgage Company, when you give a loan for 105% of the purchase price, to a buyer who is working two "under the table" jobs, paying no taxes, and can't verify their income, and then they default on the loan ... whose fault is that? Should we all have to pay the price as a society for those decisions? I think not. Should we as a society subsidize the mortgage for those who didn't report their income accurately, and who over-extended? The only solution to this mess is to put an end to the no doc loans for a while and let's give it some time for the dust to settle. If that means that some people who can't aff ord to pay will be unable to buy then perhaps that's really not a bad thing for anyone - including them.

Steve Levine is President of Steve Levine Inc. and an agent for REMAX First Choice. He's been ranked as the Top REMAX Agent in New England for nearly a decade, and can be reached online at steve@ stevelevine.com or by phone at 508 735-4663.