Sometimes, in order to look forward, it is necessary to go back.
Chances are, if you have purchased a home at some point in your life, you have heard of 100% mortgage loans.
A few years ago, these loan products were extremely popular.
Compared to the time when our parents and grandparents bought their homes, first-time buyers had a chance to buy without saving for a deposit.
Traditionally, borrowers would save up to 20% as a deposit before getting approved for a mortgage.
This protected the lenders in the instance that the borrower defaulted on the loan.
These mortgages, however, allowed the buyer to borrow the full 100% of the property’s value. The housing market was still chugging away, unaware of the impending earth shattering pop we would all soon hear.
To some, with the value of real estate continuing to rise, this didn’t seem like too much of a risk for the lenders. Those people were wrong.
100% mortgage loans only make sense when the value of the house is rising. When the market is sliding in the other direction, a 100% mortgage would put the borrower into a negative equity situation.
Many of these loans and other loan products, like the stated income mortgage, were sold at the height of the housing market. When the bubble burst, some areas of the country saw values fall more than 20%. Many homeowners were left with a mortgage debt that exceeded the value of their house.
What Role Did 100% Mortgage Loans Play in the Housing Bubble?
When asked this question, Jeff Biney, a realtor with Coldwell Banker Caine in Greenville, SC said, “I do believe that they had a part in the real estate bubble; 100% financing allowed some people that were not ready to pay a mortgage into situations that were only going to fail.
It was not the only reason why the bubble collapsed, the bubble was propped up by many different issues and 100% financing was one of them.”
Brandon Blynn, President of Mortgage Affiliates of America, Inc. in Danbury, CT. agreed, saying that, “100 % financing played a large roll in the housing crisis primarily because it did not require people to be fiscally responsible for the home, beyond a month to month basis with payments.
Secondarily, the people that purchased with 100% financing may not have had the financial stability required to maintain a home through ups and downs.”
Biney and Blynn did disagree on whether this type of product should even exist though. In Biney’s eyes, he saw “a place for 100% financing, but it has to be the last resort, not the first option.” Blynn felt they shouldn’t exist at all. “This would help the market and lenders in the long run, because the homeowners would be more serious and have more to lose.”
Where Do We Go From Here?
Blynn stated that his company was not currently using them. He stated that they were “available through a few government programs and VA lending.” He also didn’t think 100% mortgages would “ever go away, as those programs are government insured.”
Biney added that he felt that “smaller lending institutions will be the ones who probably get in the game on the private sector, as they can charge a higher rate for doing a ‘no money down’ type of loan.” When asked where the responsibility lied in figuring out if these were suitable products, both defended the homebuyers.
Biney felt that “it is up to people in this industry to educate buyers on what the pitfalls of 100% financing are.” Blynn took it a step further, saying “the mortgage company should have responsibility as far as fraud, but the entity who rates and establishes the guidelines and program should be mostly responsible.”
While it does look like these loans aren’t going anywhere, hopefully, the new eligibility requirements that most of these programs have put in place, will keep us all from repeating mistakes that were recently made.
Did you take out a 100% loan? Was it a positive or negative experience for your finances? Do you think 100% loans should be more regulated? If so, how?
This article was contributed by Victor Alfieri.
Photo courtesy of Lush T-Shirts.