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Loan Woes

2005-06-28 3 min read marco

I got the Commitment Letter from the bank, but it came with enough conditions and clauses that I might as well start from scratch. Turns out I don’t have enough open credit lines, which means the bank doesn’t know whether I will be repaying them on time. So, instead of a nice credit card report, they are asking me to provide a ton of documentation from other places where I have to pay regularly.

I suppose if I weren’t working full time, that wouldn’t bother me too much. As it stands, going through a ton of hoops and last minute additional requirements is becoming a full time occupation that I really could do without. I am really at the point where I want a broker to be involved.

This whole lending system is a bit odd. I have been watching the young couples marching through the two-bee-one-bees (2 bedroom, 1 bath) in Potrero Hill for a million bucks, and I just can’t fathom how they could cough up the money. The bank will pay all of it, plus give them a negative amortization loan. Those really exist!

And then there is me, with a really nice salary, no obligations, a ton of cash, and my loan officer is making me go through the paces to get more and more documentation. Makes no sense to me. I will have my Ninole property long after all the poor bubble borrowers are going to go belly up.

This whole housing bubble, indeed, seems to rest solely on these loans that would have been considered high risk a few years ago. Oddly enough, we mention low interest rates as the leading cause for the housing bubble. But that’s not correct: the bubble is caused by a series of new lending products that cater to a market that didn’t exist because it was too risky. Now this market is tapped, and everyone is streaming into the home mortgage business.

Should there have been more regulation? Probably. It might have been better to start allowing lower down payments and slowly move towards the 0% down. But of course as soon as the first financial institution comes up with a no-down loan, all others have to follow suit.

What is the downside? Well, for one the 0% down is accomplished by creating a high-interest rate down payment loan which is complemented by a regular mortgage loan. Just like my construction loan is tied to the prime rate, these down payment loans are, too. Only mine will automatically convert to the regular rate once the construction is complete, while these down payment loans run for years. If the prime rate goes up significantly (by about 4% or so), a considerable amount of those 0% loans are going to fall apart.

At that point, of course, the number of defaults will start dragging down the market. That would be the official end of the speculation bubble, which would in turn dry up the cash flow to the housing market. (There is a minuscule positive effect that comes in at this point, due to the probable loss in the stock market in conjunction with the worsening economy.) Next we’ll have a lot of loans with negative equity. Scary!