Home & Garden Columns
With more bad economic news being revealed daily, I think even those of us who aren’t planning to sell, buy, or refinance a house are getting rather nervous. It’s come to the point where one starts to wonder how surreal it could get, given that some lenders are suddenly deciding to cancel or freeze home equity lines of credit, even for borrowers who have made all their payments on time, or are refusing to subordinate to new first mortgages, making it impossible for people to refinance.
It makes one want to go through the loan papers to make sure the first mortgage doesn’t have some hidden clause which basically says, “We’re the bank and if we suddenly decide we need the whole $415,000 we lent you then we’ll send you a letter to that effect and you’ll have 30 days to pay up.”
Funny thing, these are the very same banks that only a year or two ago were encouraging people to use their houses like ATMs for vacations, college tuition, or paying off their high interest rate credit cards. Not to mention encouraging “cash-out” refinancing where people were encouraged to take out a loan for more than they needed—say an extra hundred thousand—because the bank would make more income on a larger loan amount. But now that their complicated financial schemes are going to hell in a handbasket, suddenly it’s our fault.
There’s been a good deal of finger-pointing, naturally. Some like to blame the victims, saying they never should have been given loans, it’s their fault they didn’t read the fine print, surely they realized they wouldn’t be able to afford the payments when their adjustable loan adjusted. It’s easy to believe this if you’re one of those people who is terribly financially savvy, or someone lucky enough to have owned their house since, oh, 1964 (back when only one income was often enough, and the payments only took 30 percent of it).
I’m sure it’s true that there are many people who probably should not have been allowed to buy a house—the people whose credit scores suggested that handling money was maybe not their strong suit. If the only loan you can get is an adjustable loan linked to a volatile index that adjusts every three months and starts at 9 percent when prime fixed-rate loans are going for 5.5 percent, then that might be a clue that you shouldn’t be buying property.
On the other hand, some lender was happy to make that loan, and then sell it in the secondary mortgage market, and is not now willing to drop the interest rate on it, in order for the borrower to continue to be able to pay it. And there may have been a mortgage broker who arranged the deal, and was happy to take 1 percent of that $500,000 up front as payment for doing so. He or she may have been honest enough to tell you it was a bad loan, but probably wasn’t honest enough to tell you shouldn’t be buying the house.
But I can tell you about reading the fine print. I’ve owned 11 houses, and I’ve read lots of loan documents. Various laws have been passed that tried to make them more consumer-friendly and easy to understand—but they aren’t. They are all about covering the lender’s rear and kicking yours. Lawyers were involved in the writing of them—need I say more? I’m pretty sure the documents for my home equity loan don’t actually say, “There may come a day when the economy has gotten so screwed up and we’re feeling so paranoid that even though we promised you could borrow this money from us on these terms we’ve decided that you can’t, and actually, whatever you’ve already borrowed we’d like back immediately even though we said you didn’t have to pay us back for 10 years.”
Another scapegoat has been “stated income” or “no documentation” loans. I have no doubt that many people either outright lied or least fudged their assets a bit. (It’s harder to fudge your credit score, although there are various sleazy ways to do so, and I’m sure some people used them.) But many of those loans went to people who, like me, are self-employed.
Before stated income loans came along, self-employed people often had to either: have a spouse with a job, get a co-signer with a job, or spend the three years before they wanted to buy a house purposefully NOT taking all the income tax deductions they were actually entitled to in order to make their income look better to a lender. Interestingly enough, the other prime candidates for “no doc” loans are rich people who don’t want the lender to know many specifics about their financial situation. In any case, these loans are already becoming unavailable.
Then the PMI companies (private mortgage insurance—which you have to pay on most loans if the down payment is less than 20 percent) announced that they have redlined ALL of California, as well as several other states. Great. So now, in one of the most expensive real estate markets in the U.S, you’ll have to be able to cough up hundreds of thousands of dollars for the down payment in order to get a loan.
For instance, under the higher conforming loan limits that were temporarily put into place ($729,750 instead of $417,000), you could pay $912,000 for the property, but you’d have to put down $182,400. Even on a lower priced house, say $450,000, you’d still have to cough up $90,000. As usual, things are easy if you’re wealthy, but they suck for the rest of us. I hope you weren’t under the impression the Fed cares about what happens to regular people. I guess we should be happy the rates are actually coming down on existing home equity lines of credit—mine is now at a lower rate than my first mortgage!
The good news? Prices have dropped pretty significantly. That may last a while, but it won’t last forever. The Bay Area is still a desirable place to live. If you want a house for $35,000, move to South Dakota. Otherwise, if you have a fabulous FICO score, a lot of cash, a high-paying job, and you plan to stay in the house for a while, now is probably a good time to buy.
Jane Powell is the author of Bungalow Kitchens and other bungalow books.