Will new financing regulations pop the real estate bubble
In 2000, very few home buyers used creative financing to purchase a home. In just 5 years, almost 30% of home buyers are now using interest-only and option adjustable rate mortgages in order to afford the sky-rocketing cost of real estate in places like Southern California.
Recently federal regulators have proposed new guidance to mortgage lenders to help prevent the massive default of loans.
"Increasingly, they are being mass marketed as affordability products to borrowers," John Dugan, the head of the Office of the Comptroller of Currency, which regulates financial institutions, said in a recent speech before the Consumer Federation of America. "The fundamental problem with payment option ARMs, other than the growing principal balance due to negative amortization, is payment shock." (more)
Obviously there are a good percentage of borrowers that could afford to finance their real estate purchases with fixed mortgages; however, there are also large numbers of borrowers that are using these unique mortgage products because they are the ONLY way they can afford to buy a home.
Regardless of whether a massive number of mortgages eventually default, just limiting these mortgage options could take a great number of potential buyers out of the real estate market. Obviously this would have a big effect on the number of real estate sales, which would have to stagnate or reduce home prices.
Inevitably, it seems that the real estate market has reached the ceiling and that a certain amount of cooling is due, just how much cooling is yet to be seen, but many analysts are predicting drops varying from 10 to 30 percent.
Recently federal regulators have proposed new guidance to mortgage lenders to help prevent the massive default of loans.
"Increasingly, they are being mass marketed as affordability products to borrowers," John Dugan, the head of the Office of the Comptroller of Currency, which regulates financial institutions, said in a recent speech before the Consumer Federation of America. "The fundamental problem with payment option ARMs, other than the growing principal balance due to negative amortization, is payment shock." (more)
Obviously there are a good percentage of borrowers that could afford to finance their real estate purchases with fixed mortgages; however, there are also large numbers of borrowers that are using these unique mortgage products because they are the ONLY way they can afford to buy a home.
Regardless of whether a massive number of mortgages eventually default, just limiting these mortgage options could take a great number of potential buyers out of the real estate market. Obviously this would have a big effect on the number of real estate sales, which would have to stagnate or reduce home prices.
Inevitably, it seems that the real estate market has reached the ceiling and that a certain amount of cooling is due, just how much cooling is yet to be seen, but many analysts are predicting drops varying from 10 to 30 percent.
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