Magazine article Mortgage Banking

Real Estate's Allure

Magazine article Mortgage Banking

Real Estate's Allure

Article excerpt

You can't throw a rock in California without hitting a loan officer or real estate agent willing to relate horror stories about the recent housing boom. For example, a young family in Santa Barbara decided to refinance their fixed-rate mortgage (FRM) into an option adjustable-rate mortgage (option ARM). Why? So they could make the minimum payments and have money to buy investment properties.

But after making a few purchases, the family found they couldn't keep up with payments on all their units. Loan resets soon will increase those costs. Now the young mother--who works as a waitress--finds it hard to talk about her situation without crying.

Today there's an ongoing public debate about how to protect consumers and make sure they are well-educated about their choices when they're taking out a mortgage. It's certainly true that consumers make their choices and are responsible for the consequences. Regulators can't protect everyone in every circumstance, particularly those who are either hopelessly naive or greedy.

Educating the consumer is a priority, industry notables agree. Lenders also want regulations that don't require them to markedly change how they work. Perhaps lenders should consider adding a disclosure showing how high monthly payments could go after the first adjustment, they suggest. Yet won't virtually every reputable loan originator already be doing something akin to that? And won't any homebuyers with common sense find out how high their monthly payments could conceivably go?

Not always, in both cases. Loan officers and consumers alike can be blinded by the premise that real estate offers risk-free riches. Too many suppose they have what it takes to be a successful investor, while forgetting that even real estate mogul Donald Trump has two bankruptcies in his past.

Only 30 percent of Americans are renters, and many of them live in apartment buildings. Yet millions of homeowners have followed the advice of "experts" and purchased rental homes in recent years. Many consumers bought into the idea of the American dream of real estate as a perpetual wealth-builder.

So perhaps it's no surprise that consumers often don't read mortgage disclosures, and are more interested in just what the first month's payment will be. After that, too many assume, the powerful real estate market will take care of their investment.

What should be shared responsibility by mortgage industry participants doesn't always work out that way. …

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