(This one is a little long, but I need to address this.) I speak to clients, friends, family, and other current or potential homeowners and people that work in the real estate or mortgage industry on a daily basis. It’s inevitable that the thoughts of the 2008 recession and market crash are in the back of almost everyone’s mind. How can it not be?! considering the detrimental effects it had on the majority of families in our country and other parts of the world! It was a very dark time for many… I can say from personal experience.
I can’t help but sort of laugh now when people say “there’s another crash coming soon” or “we’re heading towards another recession”. I completely understand that people will be skeptical and nervous, especially when they aren’t involved in or understand the back end of the financing process. Let me tell you that it’s HIGHLY unlikely that can happen due to the real estate/financing market for many reasons which I’ll explain. The primary reasons the market crashed in 2008 were the following…(and these may not be all of the facts but I am telling you what I know from my 15+ years in the mortgage industry)
The finance industry in the early-to-mid 2000’s was the “Wild West” so-to-speak. Anyone with a pulse, and in some cases without, could get a mortgage during that time. There wasn’t much regulation which caused many unethical people in the industry to take advantage for their own benefit. The combination of a few different parts of the industry caused a very messy situation that was bound to implode. If you give people too much power and freedom, some will eventually cause trouble!
I remember buying my first condo in 2005 with a ‘Neg-Am’ loan (negative amortization) and my third home for over $600,000 with 100% financing by 26 years old! Sounds crazy right? For those that haven’t heard of Neg-Am loans, they were mortgage loans which would give you an extremely low monthly payment because you would essentially only pay a portion of what the payment should be. The difference, or negative amortization, would be rolled into your home’s equity or ‘future expected’ equity based on market inflation. For example if your fully amortized payment was $1000/month, you would only have to pay say $600 and the other $400 would be added to your loan amount on a monthly basis. Since the market was appreciating at a fast pace, everyone thought this was a great way to buy something that was out of your budget at an affordable payment. It’s sort of like a hybrid-reverse mortgage. Sounds interesting right? That’s what I thought before too! Part of the problem here was that if inflation wasn’t surpassing the negative equity being added to your mortgage, you would be upside down and stuck in that mortgage… as many were once the market crashed. It allowed home-buyers to overstretch their affordability.
The other scenario of 100% financing is somewhat the same. You don’t have any equity going into the property and no skin in the game, so you are once again gambling on market inflation to gain equity. Doesn’t seem like whoever came up with these loans really thought them through! Getting 100% financing on any type of mortgage today, better yet a Jumbo loan, is a long-lost fantasy. Needless to say, thankfully these types of mortgage loans DO NOT exist anymore which helps prevent some of the real estate issues we faced in those times.
To add to that from the standpoint of property market value being over-inflated; Appraisers were not under the microscope as they are now. They were sort of left to do whatever they felt fit in many cases, which sometimes would depend on what side of the bed they woke up on! I recall contacting appraisers directly to place orders (which doesn’t happen now) and the appraisers would ask me “What value do you need?”. Back then, I didn’t think anything of it because I was fairly new to the industry and that seemed to be the norm. Thinking back now and considering all of the crooked people that were involved in the industry, that was INSANE! Today lenders and appraisers do not have any direct contact or communication. AMC’s or Appraisal Management Companies were created to be the liaison between lenders and appraisers. In today’s market, orders are placed by the lender to the AMC then assigned to a certified appraiser on a round-robin system. The appraisal reports are then audited by the AMC before being sent to the lender, which then goes through QC audits with most lenders too. This regulation forces appraisers to be more honest and sometimes very conservative with their market values. That may cause issues if value doesn’t come in where you need or want it to, but it also saves you from overpaying for a home or overstretching your homes equity. It’s a good thing, trust me!
Another issue was that lenders, real estate brokers, title companies, and appraisers could all be owned by the same people and directly affiliated. That can really, well… you can use your imagination about how someone can take advantage of having all the power to control the entire process. There were more factors involved but this sums up a few big points of why I can’t see another market crash anytime soon in my opinion. Yes value has been increasing in many markets, but that’s primarily due to supply and demand as it does with anything else. Once we have more supply (homes for sale) and less demand (buyers), we should see property value settle down a bit. Personally I think that will happen within the next 3-5 years but that’s just my guess. Take it as you will. Best of luck!