Here’s a question I am asked on a regular basis: When is the housing market going to crash (again)?
Let’s answer that by talking about the STATED INCOME LOAN – This loan destroyed the economy 10 years ago. It single-handedly killed the American dream for an entire generation – many of whom are still struggling with the fallout to this day. It began as an attractive loan product for self-employed people to qualify for a mortgage and immediately exploded in popularity because it created billions in short-term profits for investors, homeowners, lenders, loan officers and, most importantly, the Wall Street financiers whose firms bankrolled the whole thing. Wall Street was so happy with the stated income loan that they started to tweak and manipulate the loan product so they could offer it to a larger audience of potential borrowers.
The stated income loan went from being a niche product for self-employed borrowers to something that was being made available to everyone. Because it was now easier than ever to qualify for a stated income loan, lenders went into overdrive pushing it on unsuspecting borrowers – “Don’t worry about the paperwork, let’s just wrap this loan up today, get it funded and you will have your equity by next Wednesday!” Millions of people were using this loan to purchase real estate on the assumption home values would continue to increase. Getting a stated income loan was an easy and convenient method for homeowners to cash out, pay off debt, buy a boat, remodel their home. It was the cash register for anyone needing a few extra dollars in their pocket.
Note: Roland E. Arnall created Ameriquest Mortgage, the company reputed to have created stated income loans. Read about his history, involvement in politics and connection with the Bush administration. I know many of you hate government oversight but when you have people in powerful positions making decisions based on personal profit, you have to: (1) Question their sincerity and (2) ask how such a blatant conflict-of-interest was allowed to take place at the highest levels of politics.
So why am I going on about a loan product that hardly exists today? Because I am hearing more and more people talk about the bubble bursting soon on the current housing market. I am also hearing rumblings about the stated income loan coming back.
According to data available we are just about back to where home values were 10 years ago. We have had a steady increase in home values for the last 7 years. What is the difference between today and 10 years ago? The stated income loan does not exist like it once did. There is a stated income loan but it is only available for people that are self-employed and it usually requires 30% down payment or equity.
With no stated income loan available for homeowners over the last 8 years, we have a market full of owners that have used real income to qualify and purchase their home. There’s a HUGE difference in the fundamentals of this market compared to 10 years ago. You can’t compare this market to the previous market. Yes, we will see the market cool off because the income earned by individuals can only qualify to purchase so much property. We may also see regions of this country affected by layoffs or local issues in the economy. What we do not expect to see is the entire country’s real estate sector wiped out like we did before. The foundation that this housing market is standing on is so much more stable compared to 10 years ago.
In order to continue the cycle of increased home sales and rising home prices you need more homeowners to use the equity they have accumulated over the last 8 years to purchase larger homes with higher down payments – and we aren’t seeing those move-up buyers like we did 10 years ago. Why? Because the lack of availability of the stated income loan makes it harder to qualify for a new loan. Another reason could be that the housing crash from 10 years ago is still fresh in many homeowners’ minds and they’re more conservative when it comes to blowing their savings on a newer, larger home – an extra bedroom or larger backyard may not be worth the risk.