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High Home Prices, Subprime Borrowers: Is History Repeating itself?

HI5-18-13For every positive sign of a housing comeback, there seems to be a chorus of anxious market watchers ready to find ominous signs of a new collapse looming on the horizon. Those gloomy predictions may be overstating the concerns, but a number of financial analysts and real estate experts point to several factors that echo conditions just before the last great housing crash.

According to a new article posted by The Motley Fool, the recent surge in housing prices sounds a warning bell. The rising home pieces seen in major markets around he country have been welcomed as a sign of economic recovery and new energy in the housing market. But, observers say, high home prices contributed to the previous crash, which saw the market bottoming out and millions of risky borrowers facing foreclosure.

Back then, home prices across the board were rising and sales were booming. But those high prices shut out a substantial number of less affluent potential buyers and left houses unsold. So to keep sales moving, lenders rolled out a smorgasbord of risky new loan options such as low interest, no-interest and even negative amortization mortgages that appeared to make homeownership available to anyone who wanted to buy –even those with below optimal, or subprime credit. Many of these buyers, woefully under informed and poorly prepared, lost their homes when payments ballooned or circumstances changed.

Now, industry observers point out, prices in some markets are approaching levels not seen since before the last crash. Banks are once again beginning to offer some of those risky loan products such as the no-interest mortgage. And the so-called “strategic defaulters” – those who chose to walk away from their mortgage during the crash – re being welcome back by lenders willing o overlook the credit hit those borrowers took the first time around.

And there’s one more factor that completes the deadly combination. Recent surveys on American homebuyer behavior reveal that today, as in the period preceding the last crash, many potential home purchasers are uninformed and unprepared for taking on a mortgage. These would be borrowers don’t know they can shop around for mortgage rates and options and rely on loan officers’ explanations rather than reading the fine print themselves.

When high prices push housing past the affordability threshold for many purchasers, standards drop and lenders begin courting riskier borrowers with problematic loan products and eventually the process collapses on itself. Will lenders learn the lessons of the past? Financial experts point to the behavior of major US banks after the collapse for the answer: a resounding no.

The key to avoiding this scenario, say some financial advisers, lies in the hands of potential borrowers, who need to clearly understand what their options are and what they’re getting into when they take on a long-term mortgage. Taking charge of learning what you need to know is Jason Hartman’s first commandment for heroic investors – wise advice that might keep history from repeating itself.  (Top Image:Flickr/PaperCat)

The Heroic Investing Team

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