Borrowers shun bubble-era mortgages

By JEFF LAZERSON / CONTRIBUTING COLUMNIST

2/5/2016

Steroid mortgages to buy those big boy properties through a lot of leverage and a menu of other exotic mortgages for hard to finance borrowers are back.

Orange County borrowers can put just 5 percent down and borrow up to $1.5 million or put 10 percent down and get a loan amount up to $2.5 million. You can get a new loan just one day out of a foreclosure, short-sale or bankruptcy. Or, how about free down payment assistance up to 5 percent of the loan amount with almost no restrictions if you are short of skin-in-the game (down payment).

So, what’s the catch? The catch is the interest rates on these bad boys can be almost double what your mortgage maker charges for a standard Fannie Mae, Freddie Mac or FHA type home loan. And, of course investors pushing these mortgage products to you and yours are motivated by major money made on the back end as a result of these lofty interest charges.

Earlier this week, The Wall Street Journal ran a front page article entitled: A Crisis-Era Mortgage Makes a Comeback. The article refers to several large investment houses lobbying lenders to sell the old low-doc loans, referring to mortgages for borrowers who can’t fully document their income, which led to a tidal wave of defaults during the mortgage crisis.

The truth is that these out-of-the-box mortgages have been getting peddled for a few years now. Certainly we’re seeing more investors now than then. And, one benefit will be price compression as there is more exotic mortgage menu competition and more choices.

Let’s be clear, I’m not saying never consider one of these loans. I’m just saying think really hard to prepare your backup plan should you lose your income or values drop.

Lost on all of this is the discerning borrower. Mortgage shoppers have changed. They’ve made great decisions to buy within their means, largely taking a pass on the financial instruments that can get them the bigger, badder house or get them in sooner than when they are truly ownership ready.

A decade ago, the anxiety level was so high and the fear of loss was so great that if one didn’t buy immediately, he or she would never be able to afford a home, Orange County or anywhere.

Credit should also be given to Fannie, Freddie and the Consumer Financial Protection Bureau or CFPB.

Very preachy, but they were all really right-on about responsible lending and responsible borrowing. The CFPB’s added hammer was and is that if your lender gives you a loan that doesn’t fall into the safe-harbor category known as a qualified mortgage, you better document the heck out of why you gave the borrower that loan anyway.

And, if you can’t justify the borrower’s ability to afford this, the borrower will be able to rescind the loan up to three years later.

Congratulations, Orange County homeowners and mortgage shoppers!

If you have questions or comments, please contact Jeff Lazerson by clicking here.