Risky Loans Leaving Homeowners With Negative Equity

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The US economy is now growing at a rate that is less than the rate of population increase. In other words, if it keeps growing at this rate we’ll all go broke.

Housing corrections take a long time. There are now 700,000 new houses for sale…and more houses for sale, overall, than any time in history. It will take years to work down this inventory, because sellers typically resist price cuts…as long as they possibly can.

Money Magazine has done a series of “Scenes from a Bubble,” referring to the housing bubble:

“MONEY has obtained more than 100 emails and faxes sent by loan officers to appraisers across the country. The language varies from asking if a predetermined value was possible to promising more business if a number could be hit.

‘”Many homeowners are finding out that the equity they were led to believe they had in their house is not actually there,’ says John Taylor, president of the National Community Reinvestment Coalition.”

MONEY took an example. Mr. Kim obtained a no-money-down US$642,000 mortgage, based on an appraiser’s estimate of the value of his house. MONEY’s own appraiser judged the place worth only US$580,000.

The result: Kim now owes US$62,000 more than his house may be worth. How many people are in that situation?

How long will it take them to reckon with the negative equity in their home? We don’t know that either. How did they get in that jam? That, we do know. MONEY continues:

“Wall Street’s rocket scientists keep finding more sophisticated ways to repackage and resell mortgages. As a result, lenders stopped worrying so much about credit standards and learned to love risky loans.

“Now a lot of that lending looks foolish. Mortgage delinquencies among so- called subprime borrowers have risen to 13%, the highest in at least 10 years. The market for the lowest-credit-quality mortgage bonds has tanked. And investors in CDOs may be in for a rude shock.”

Meanwhile, yesterday, yields on the long bond – closely linked to mortgage rates – rose to 5.06%. Not good for the housing market.

Bill Bonner
The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
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2 Comments on "Risky Loans Leaving Homeowners With Negative Equity"

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Steven R. Smith, MSREA, MAI, SRA
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Steven R. Smith, MSREA, MAI, SRA
The weak link in the industry has been the lowest paid, most pressured, the appraiser. Many have been subjected to Classic Conditioning to be cooperative, or even trained to be so, to hit numbers to make the loans work. In any given City or County, there is probably less than 5% of the appraisers who are truely neutral, objective and unbiased; although all licensed appraisers certify that they are. Most residential appraisal assignments start with a predetermined value promise in recent years. Pushed values 5% to 10% per year, have lead to a 25% to 50% over valued market over… Read more »
Keith Jenkins
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Being an Australian based mortgage broker in this space, a few comments are worthy, I feel. FIRSTLY, Valuers in Australia are not easily influenced to over price a property. If something goes wrong with a loan, the VERY first person in the firing line is the Valuer. If it can be proved that they overvalued a property, then they will be sued and sued hard. The mortgage insurers want to recover any lost monies, so the Valuer is an easy target (their PI insurance is astronomical). SECONDLY, let’s define a sub prime lender. This is not as easy as it… Read more »
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