One if by Leverage, two if by Standards

I decided to get my real estate license in 2005 so I could work with banks to sell their inventory of foreclosed homes.  Since I had experience in B2B sales and contracting, it seemed like the best fit for me in a new industry.

I also noticed that getting a loan was easier that it was ever in the past.  And that buyer’s with less than good credit could get a loan without any verification of their income (and ability to repay).

They were called stated income loans. Because of them, I thought that it might be a good time to enter the industry.

However, I never expected the financial tsunami that would come in a few years.  

After the crisis, these loans took on a new name, “liar loans,” however they were only part of the problem.

According to studies completed by CoreLogic, a leader in information intelligence for the real estate and lending industries, mortgage defaults are driven by excess leverage.    

And by leverage, I mean your Loan to Value ratio (LTV).  

If you are buying a $100,000 home and you borrow $95,000, then your LTV is 95%.  

Back then is that we would often allow people to borrow more than the value of the home.  Sometimes up to a 120% LTV.

This seems ok in a market like we have today, but when the economy turns it leaves these borrowers vulnerable.  If they can’t sell their home for what they owe, the only other options are a short sale, deed in lieu or a foreclosure.

None of these are good options and most end in foreclosure.

I’m sharing this with you because of the current market conditions.  The current foreclosure rate is below 1%, which is very good.  We got here because of tight lending standards and leverage requirements implemented over the last 10 years.

However, there is pressure in the market to ease up on both of these.  

And that’s why I am bringing you this information.  While I do not see us headed back to the requirements from 10 years ago, anything is a possibility. 

Earlier this year, BurkeyLoan, brought back the 120% LTV program and began pitching it to millennials as a way to combine both their mortgage and student loans.

While it hasn’t hit mainstream lending, its worth keeping an eye on it.

If you see home sales and leverage at record levels, then it’s time to batten the hatches and prepare for the coming storm.  

You can also stay tuned here as I will be placing lights in the Old North Church when I see trouble on the horizon.  

Do you have concerns about the market?  If so, hit reply and share them with me.  

The Daily Deal in Nashville is this beautiful renovated Tudor in a convenient location in Green Hills that is listed for less than $500,000.