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Mortgage Blog

Jun 25

Is Another Housing Price Bubble Looming?

The question is being asked with increasing frequency, and also with great anxiety.
The last housing bubble led to a financial crisis followed by a recession.

Many of those commenting on the question, however, don’t understand what a price
bubble is. It is NOT a marked rise in prices. Sharp price increases are common,
and pose no threat to the stability of the economy whereas price bubbles are
rare and do pose a threat.

A price bubble is a rise in price based on the expectation that the price will
rise. Sooner or later something happens to erode confidence in continued price
increases, at which point the bubble bursts and prices drop. What makes it a
price bubble is that the cause of the price increase is an expectation that the
price will increase, which sooner or later must reverse itself.

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May 8

Mortgage Qualification Rules Are Not Always Black and White

Some of the more interesting questions I receive from readers are about unusual
situations that may affect their ability to qualify for a mortgage. The rules
are not always crystal clear, which is why lenders continue to rely on
underwriters whose stock in trade is good judgment. Here
are a few illustrations.

Will the Spouse's Unprofitable Business Derail the Application?

"I have W-2 income with the same employer for over 10 years that
is sufficient to carry the mortgage amount we are requesting. My spouse is
self-employed and has had business losses for the past 3 years. These losses
are deducted from the adjusted gross income reported in our joint tax returns.
We will own the house jointly. Question: Should I leave my self-employed spouse off the mortgage application?"

I would submit the application in your name with your income,
indicating that title will be held jointly. This is common and what most
couples do when only one is working but both will own the house. You proceed
just as you would if your spouse was not employed. If
the underwriter is satisfied with the transaction, which is very likely because
of your high credit score and down payment of 20%, that will be the end of it.

There is the possibility, however, that the underwriter will request your tax return.
Before the financial crisis, this seldom happened when an applicant could
document income with W-2s. Now it happens occasionally. If
it happens in your case, the underwriter will see the losses, and in the worst
case, will decide to deduct the losses from the income used to qualify. The
more likely possibility , however, is that the underwriter will elect to ignore
the business losses because you can document that the losses have been funded
out of savings and not out of your income. Another possible reason for ignoring
the losses would be that they have come to an end because the business has
turned the corner, or it has been shut down.

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Mar 27

Buying a New House Before Selling the Old One

Home owners buy their second or third homes for a variety of
reasons. They may be trading up to get more space and amenities; they may be
downsizing, because they don't need as much space and want to cut expenses;
they may want to relocate to get closer to their place of employment or their
children, or to enjoy a more attractive climate.

Whatever the reasons for the move, many face the same
challenge: how to use the equity in their existing house to purchase the
new one before completing the sale of the old one. Selling the old one first
avoids this problem but requires two moves, which is a major expense and a
hassle.

This article considers 4 ways to change houses with only a
single move.

*Borrow against your 401K account.

*Take an unsecured bridge loan from your bank.

*Take a HELOC.

* Take a secured bridge loan from the lender financing your
new purchase.

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Dec 12

Can Bad Financial Habits Be Unlearned?

I felt this would be a timely blog heading into the new year.

Some readers of a previous column recognized themselves in my description of a "NOHO":  someone
not cut out to be a homeowner. NOHOs live paycheck to paycheck, price
substantial purchases in terms of the monthly financing charge, and typically
have no reserve for meeting unexpected contingencies. Some readers asked me how
to change this pattern, and I decided to take a stab at it in this blog. While
I have no professional credentials as a psychologist, I have had some
experience in converting bad habits into good ones.

My bad habit of many years standing was eating late at night before I went to bed. It was bad for my
weight, my digestive system, and ultimately my health and life span. I knew all
that, yet the prospect of a slimmer body, better health and longer life span
did not motivate me to change my eating habits. The benefits of those desirable
goals were just too far away.

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Nov 7

Why Many Good Mortgage Loans Are Not Being Made

The housing sector today is not providing the economic stimulus we had come to
expect during periods of economic recovery. A major reason is that the
underwriting rules and practices that determine whether or not an applicant
qualifies for a home mortgage are much stricter today than they were before the
financial crisis.

In part, the tightening reflects changes in the market environment that make
mortgage loans generally more risky than they were before the crisis. The major
factor was the nationwide decline in house prices between 2006 and 2009, the
first such decline since the 1930s. The very liberal terms that prevailed prior
to the crisis were based on a widespread belief that such declines were a thing
of the past. When price changes are always positive, it is very difficult to make
a bad mortgage loan. Now that the market understands that house prices can
decline, mortgages are considered riskier.

A second factor has been the post-crisis practice of Fannie Mae and Freddie Mac
to require lenders originating loans for sale to the agencies to buy them back
if they default too quickly. This has caused many lenders to impose
underwriting rules (referred to as "overlays") that are more restrictive than
required by law and regulation.

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