Easy home loans from yesterday lead to foreclosure today

Too many inexperienced brokers led to too many questionable mortgages

The real estate market has had explosive growth in the past five years. That has been great for homeowners, who have seen their property values rise. It’s been great for realtors, who have been busy raking in commissions. And it’s been great for lenders and brokers, who have been so busy handing out loans that they often haven’t even had time to return phone calls.

It hasn’t been all that great for people who want to buy homes, as they have had to contend with ever rising prices and a competitive market that often sees houses sell for more than the asking price the very day they are put on the market. Buyers have also suffered from taking out loans that were offered to them by inexperienced brokers who were more interested in getting a commission than they were in finding the right loan for the customer.

The market has begun to slow down. Interest rates are up, people are tired of the high prices and homes that used to sell in days are now selling in weeks or months. But one side effect of the earlier busy market is just now coming to a head - foreclosures as a result of too many home sold with the wrong loans. 

All across the United States, foreclosure rates are up. They are particularly high in Florida, where the real estate market was among the country’s best. The huge influx of buyers and the skyrocketing growth in prices led to a huge increase in the number of mortgage brokers in the state. At one time, some 4000 people per month were taking the exam and some parts of the state have five times as many brokers as they did in 2000.

This has led to several problems:

• Inexperienced brokers were often providing loans to people that were wildly inappropriate for their finances.
• Brokers were offering high-interest, subprime loans to people who otherwise might have qualified for better, “prime” loans instead.
• Competition among lenders increased the likelihood that a broker, in order to get a buyer into a house they otherwise couldn’t afford, would offer them a risky loan.

Several years later, as the markets have cooled off, foreclosures in south Florida are up nearly 70% over last year. Buyers are discovering that the loans they took out are no longer affordable. Many of these loans were risky Option ARM mortgages that are just now adjusting to significantly higher interest rates. Buyers are finding that their payments are nearly doubling over what they were paying just a few years ago. And they are responding by walking away from their property in record numbers.

Some homeowners are still coming out OK. They have enough equity in their houses that they are able to avoid foreclosure by selling the homes at a profit. That won’t last, however. As more people discover that they can’t afford their homes, more and more property will become available. Once that happens, the glut of available homes will probably drive prices down to the levels of three or four years ago, and sellers will be lucky to break even.

It’s nice to have a broker trying to find a loan for you. But make sure that the loan is a good fit. Otherwise, you may soon be giving the house back to your lender.