KEY CULPRIT IN THE CURRENT MORTGAGE MARKET CONUNDRUM? SIMPLE HUMAN NATURE!

KEY CULPRIT IN THE CURRENT MORTGAGE MARKET CONUNDRUM? SIMPLE HUMAN NATURE!

HUMAN NATURE – ONE OF THE KEY FACTORS OF TODAY’S CURRENT MORTGAGE MARKET DIFFICULTIES?

According to a story in the November 18 2007 Chicago Tribune by reporter Marilyn Kennedy Melia just a few short months ago many mortgage consultants were suggesting interest-only adjustable rate loans and very low introductory interest rates. Starting rates for these "Interest-Only Option ARM’s" were low and so were initial mortgage payments since these loans were interest only.

Many buyers were attracted to these low-payment loan programs. Using then-applicable qualification formulas buyers could then afford a more expensive house while keeping their house payments very low. Some short-sighted or perhaps unethical loan originators offered low-cost refinancing should rates rise to an uncomfortable level while a few of the more concerned loan professionals suggested adding to the additional principal to the low monthly payments so at minimum equity could build at a higher level should rates adjust upward. At that point when the rates adjust the higher rates would be based on a lower amount of principal as the extra equity payments would reduce the principal then due on their mortgage loan.

In reality however most of these Option ARM borrowers paid just the minimum low payment. Human nature right? As these rates are now adjusting upward some by a considerable amount many failed to qualify for refinancing as new more stringent loan underwriting rules have since taken hold. Many of these homeowners are now in default!

Economist Tomasz Piskorski of Columbia University is disappointed by the difficult situation Option ARM borrowers now face but not surprised. He feels that if such borrowers were required to receive special counseling before taking such mortgages as is now required in many states and is being enacted in Illinois next year they could learn to use these custom interest-only programs to their advantage.

Borrowers are not always completely rational however when signing for a new home loan.

DEAN’S TEAM LEADER

DEAN MOSS