In 2006, many banks and lenders began offering subprime mortgages to customers with less than perfect credit scores. Soon after, we started to see a high number of borrowers with late payments and foreclosures which started to drive down home values and caused the housing market to collapse and spread to across the country from 2008 to 2010.
I am often asked if the real estate market is going to collapse again, as many are concerned about the rise in prices in recent years.
According to Realtor.comAlthough asking prices for American homes continue to rise, there are signs that the scorching housing market has passed its peak, according to a recent report. The median listing price is up 12.2% from the same period in 2020, which is the 45th consecutive week that price growth has been double-digit. Despite the rise, the pace of annual price growth has slowed from peaking at 19% in early April and if the downward trend continues, prices could revert to a “more typical seasonal price pattern” over the next six months. month.
While I don’t have a crystal ball, I can share with you some of the reasons that caused the real estate market to collapse due to bad mortgage practices and what has changed to prevent it from happening again.
In the mid-2000s, you could borrow more than you could repay, get variable rate mortgages or interest-only loans, and often you wouldn’t need to provide documents to validate your income, your job, etc. X amount of money and the lender would not verify it. There were loans with negative amortization and loans without withdrawal even on investment properties. The risk was minimized by the assumption that homes would continue to rise in value.
Even my mortgage in 2006 had three payment options: 1) the minimum payment, which was negative amortization that increased my loan balance every month, 2) interest only, so I didn’t pay off my balance at all. mortgage loan or 3) a regular payment of principal and interest today. If you were limited on one month bills, what payment do you think most people took? It could be argued that the lender did not properly inform the borrower of payment options, which also contributed to the real estate crash. I believe we are all responsible for reading the fine print on all loan documents.
The good news is that the CFPB was created in July 2011 to promote fairness and transparency in mortgages, credit cards and other financial products and services for consumers. Once the economy started to recover, the CFPB drew up regulations that would prevent the mortgage crisis from happening again, which included re-estimating loans and disclosing the close. These documents provide loan details at the start of your loan and before you close, giving you time to read all of the loan terms.
Most importantly, lenders are required to verify all supporting documents, income, employment history, etc. and negative amortization and interest-only loans are no longer available. Most loans require some form of down payment and the minimum FICO score levels have increased over the years.
I think we have put in place the guidelines, the proper checks and balances to prevent what happened 13 years ago from happening again.
Branch Manager, NMLS # 1721861
Cherry Creek Mortgage, LLC, NMLS 3001