Will We Ever Learn When it Comes to Mortgage Lending?
Wednesday, May 28th, 2008I spent most of 1991 restructuring loans and trying to get people to make payments. No, I wasn’t in the collections department, I was a private banker and dealing with the wealthiest depositors of the bank. In the soaring real estate market of the late 80s banks had begun offering unsecured lines of credit to developers and when the market turned many of these clients stopped paying. When it was clear the market hadn’t just stalled banks scrambled to tighten up loose lending practices agreeing never to relax credit policies again. But, as memories became fuzzier these safeguards were stripped away.
Now that we’ve come full circle lenders are once again reigning in lending policies. Loans we could have gotten approved yesterday evaporate into thin air today. Loan programs are “retired” (a nice word for canceled), and unused portions of home equity lines of credit are frozen. No Documentation loans have all but gone away except for the self employed, and Stated Income has virtually disappeared as well. Short sales and foreclosures are growing and meanwhile values keep dropping.
What can we learn from this? There is no such thing as a sure bet in any investment. Look at the Dot-Com bust of 2000. How many of us had way too much money in tech stocks? Didn’t we see our portfolios drop by 50 percent? Afterward we all said we had to get back to balanced investing. No more heavy betting in just one industry. Yet, even after this red flag the same sort of thinking prevailed when it came to the real estate market. There was a mad frenzy to buy, buy, buy, before you were priced out of the market which caused prices to surge even further. Suddenly everybody was a real estate investor.
So here’s some advice. Calm down. If you don’t have to sell just live your life and keep debt to a minimum. The fewer homes there are on the market right now the better. Values will eventually begin to rise again. If you’re looking to buy – buy. Prices are down and rates are low so don’t wait trying to time the bottom of the market. That never works. And last, if you do buy now realize that your self-worth is not dependent upon the size of your home. Don’t fall prey to buying more house than you can afford. It’s not the size of your house that counts - but the size of your life.