Friday, February 09, 2007
Annals of Creative Financing (Housing Bubble Edition)
by Tom Bozzo
The ingredients are predictable: borrowing more than the house is worth (take your pick of fantasy valuations or outright appraisal fraud for the enabling technology), prepayment penalties (whether unwisely accepted or shoved down the borrower's throat), and lenders exercising damage control by tightening lending standards.
What blew me away was one of the anecdotes: a borrower was considering taking out an auto loan to pay the mortgage down to a point at which it could be refinanced, presumably now at only about 100% of some more-realistic valuation. I've had a tough time figuring out how that could be worthwhile other than as a sign of buyer's remorse on the "creative" ARM. After all, if recession looms larger among the usual macroeconomic risks, holding an ARM that's due to reset isn't necessarily a bad thing. If anything, the rush for the ARM exits (with nearly half of resetting ARMs to be refinanced, per the W$J excerpt at Calculated Risk) should be a pie in the face to housing analysts who suggested, in the not-too-distant-past, that the explosion of creative financing was Just Fine and Dandy because everyone rationally weighed the risks vs. conventional mortgages.
Yesterday's Wall Street Journal 'style section' featured an article on the coming adjustable-rate mortgage storm — borrowers scrambling, and increasingly failing, to get out of the "creative" mortgages they took to make their peak-of-the-bubble purchases look affordable. (See Calculated Risk for the big picture.)
The ingredients are predictable: borrowing more than the house is worth (take your pick of fantasy valuations or outright appraisal fraud for the enabling technology), prepayment penalties (whether unwisely accepted or shoved down the borrower's throat), and lenders exercising damage control by tightening lending standards.
What blew me away was one of the anecdotes: a borrower was considering taking out an auto loan to pay the mortgage down to a point at which it could be refinanced, presumably now at only about 100% of some more-realistic valuation. I've had a tough time figuring out how that could be worthwhile other than as a sign of buyer's remorse on the "creative" ARM. After all, if recession looms larger among the usual macroeconomic risks, holding an ARM that's due to reset isn't necessarily a bad thing. If anything, the rush for the ARM exits (with nearly half of resetting ARMs to be refinanced, per the W$J excerpt at Calculated Risk) should be a pie in the face to housing analysts who suggested, in the not-too-distant-past, that the explosion of creative financing was Just Fine and Dandy because everyone rationally weighed the risks vs. conventional mortgages.
Labels: Housing Bubble, Personal Finance Advice of Alan Greenspan
