A new study by First American Real Estate Solutions says that the risks of exotic homes loans should have no significant impact on the economy.
“The study concludes, however, that while individual families and firms that are involved with the riskiest loans may suffer, on a national basis the impact of mortgage payment reset and subsequent default will not significantly impact the economy, as it will result in approximately $110 billion in losses, or less than 1 percent of total U.S. mortgage lending annually.”
Excellent. But I’ll take that data with a grain of salt.
The report comes from the subsidiary of a title company, who makes money regardless of how good or bad a real estate transaction is. In fact, their revenue stream is more pervasive than real estate brokers, who can be cut out of a deal by the dreaded “for sale by owner” sign. Title insurance is something no real estate transaction can do without (at least with third-party financing).
So what motitvation does First American have for saying these exotic mortgages are no biggie. Uh, maybe real estate consumers are stretched – particularly those who haven’t entered the market yet. Expounding upon the relatively low risks of these loans is a great way to incite lenders to keep on dishing them out.
You might be better off not taking on one of these loans, despite what your future lender tells you about the low risk. If Jeff Matthews is correct, you may be able to get that home straight from the builder at a much cheaper price anyway.
When buying (if you choose to do so in a settling market) keep this in mind – the builders, the real estate broker, the mortgage broker, and the title company are all buddy buddy. It is you against them, so be careful. And go for the long term, fixed rate, whenever possible.
This isn’t the first time I’ve questioned numbers coming from these guys, and I doubt it will be the last. Some additional cursory analysis on why these “facts” don’t pass the smell test (along with a PDF of the white paper) can be found here.
Of course, if you try digging around for some statistics on the aggregate home mortgages outstanding, you’d think good place to start is the biggest buyer of them, FannieMae. Unfortunately, a search for a FannieMae balance sheet turns up nothing after the 2nd quarter 2004, as well as this ominous notice:
Cautionary Note Regarding Previously Reported Financial Results – On December 22, 2004 Fannie Mae announced that its previously issued financial statements should not be relied upon in light of the SEC’s determination that the financial statements were prepared applying accounting practices that did not comply with generally accepted accounting principles, or GAAP. For more information, please see the Form 8-Ks Fannie Mae filed with the SEC on December 22, 2004, March 18, 2005, May 11, 2005, August 9, 2005, and November 10, 2005. As a result, investors and others should no longer rely on Fannie Mae’s previously issued annual and quarterly financial statements and the corresponding information for those periods contained in Fannie Mae’s earnings releases, Annual Reports, Form 10-Ks, Form 10-Qs, Form 8-Ks, Form 12b-25, Monthly Summaries, Business Activity Supplements and Monthly Disclosures of Interest Rate Risk, Credit Risk, Risk-Based Capital, and Liquidity.
Not much else to say there.
The report concludes that the only real risk to a rippling of defaults is the impact of job losses. IMHO, if our consumer economy, driven in large part by real estate refinancings, continues unabated, real incomes will continue to fall. It won’t matter if you have a job, if you can’t afford your mortgage payment AND a loaf of bread.