Today is much different than 2008! 2008 was the result of mortgage fraud and no document qualifying loans. But what does that mean simply? Well here is what happened back in 2003‐2007 that lead to the 2008 housing boom. For you to fully understand why the 2008 crash will not happen again, you must read this fully without skimming.
Bobby is a store manager at McDonald, Bobby makes about $45,000 per year as the manager. Bobby wants to go and purchase a home and he found one that checks all the boxes but the price of the house is around $355,000. In 2003 the rates were not nearly as low as they are to this current day. Bobby applies for a normal mortgage that required income documents but the payment comes back super high at $2,603.08.
Principal & Interest: $2107.54 (Interest Rate: 6.125%) Taxes: $187.88
Mortgage Insurance: $242.66
But wait, there is down payment and closing costs…
$355,000 Purchase Price on FHA required 3.5% down = $12,425 in a down payment. Plus there is closing costs on a loan that will range from $5500‐$7500. His out of pocket expense is $19,925!
Summary: $2603 a month plus 20K out of pocket… We have another loan option that’s more affordable…
There is nothing wrong with working for McDonalds as a manager, but there is no reason a $45,000 income should be trying to afford a payment that is close to $3,000. Also… Bobby doesn’t qualify for this payment but the Loan Officers tell him about the NINA loan.
N‐No I‐Income N‐No A‐Assets (NINA) ‐ A loan where you take a higher interest rate on an adjustable-rate term in exchange for a lower promotional payment upfront, no money out of pocket, and income/asset documentation required.
Loan Officer’s Pitch: Bobby, we can get the payment down to $1800 a month, we don’t need money out of pocket and don’t worry about those requested documents as we won’t need them.
Bobby: This is great, how exactly?
Loan Officer: Well we will defer part of the loan balance as a balloon payment that is due 3 years later (2006/2007/2008) and we can get a super low rate that helps with the payment. But don’t worry about the details… The economy is booming, and you’re going to get a promotion by then that can help bring more income. Worst case, you can just refinance later and extend the 3 years with the same program.
Just like that, the sales pitch was over, the dotted line was signed as the credit card application that doesn’t require verification just turned in to the mortgage home loan. This has led to the more strict lending guidelines in mortgages in history and the most licensing requirements for loan officers going forward and the lowest mortgage delinquency rates since the crash of 2008.
Mortgage Industry Facts:
- After the crash of 2008, the hardest lending guidelines for mortgages have been instated.
- The largest overhaul of licensing standards is implemented for mortgage lending as an industry.
- The lowest fees and mortgage interest rates have come from the reform of the industry.
Law Of Economics:
- Year over year for as long as we can measure, every “crash” or “recession” housing appreciates over every single one.
- You could have been the unluckiest person to purchase in 2007 right at the cliff of the housing boom and you have now recovered.
- Housing values always increase just as the dollar’s value suffers inflation.
- Ex. You could purchase a car for $400 at one point, now its close to $30,000 for the average car.
- Ex. You could purchase a value meal for $.25 cents at one point, now its close to $8 dollars depending on the venue.
- Ex. You could of purchase Stocks in the DOW or the S&P 500 in 1980/1990/2000/2010 and your value now is better than it was then.
- Finally, to have another 2008 housing crash, the same environment would have to be present and that is not the case today.The green line represents housing values for nearly 60 years that proves this point according to the U.S. Census Bureau.
The red line represents if you were the unluckiest person in 2007 and bought right when the values tanked, values have now surpassed the crash.The green line represents housing values for nearly 40 years that proves this point according to the Case Shiller U.S. National Home Price Index. The red line represents if you were the unluckiest person in 2007 and bought right when the values tanked, values have now surpassed the crash. The grey columns in the U.S. Case Shiller diagram show other recessions where housing values remained unaffected.