By Aryne + Dulcinea, April 1, 2019
By Aryne + Dulcinea, April 1, 2019
Across Oregon, and the Portland market in particular, there has been a wave of rising home values and declining affordability. Buyers face more challenges in qualifying, and higher mortgage payments are testing buyers’ monthly budgets. As in the past, lenders are coming up with non-traditional mortgages & lending solutions designed to help buyers qualify for more home, even if their tax returns or verifiable income do not support the mortgage payment. It should be noted that these programs to not help the buyers make the payment, just qualify for the larger mortgage. Sounds a lot like 2005, doesn’t it?
Currently, these mortgages represent a very small percentage of the total mortgages originated. They are also reported differently to regulators and subject to greater scrutiny. Although financial memories tend to be short, it seems unlikely that these loan products will lead to any type of 2008-style meltdown. They just aren’t that prevalent and are unlikely to become so. What’s more likely is that individual consumers will be harmed – and likely the most vulnerable. There’s a saying in financial circles that “rich people don’t buy lottery tickets.” That means that the folks taking the most risk are typically those that can least afford it.
In addition to the mortgage types mentioned above, there is a new product that claims to actually help homebuyers borrow more with a lower monthly payment. If you have a lot of equity in your home, you’ve likely received multiple mail solicitations offering a payout or “investment” in return for sharing in your home’s appreciation when you sell. Typically, the “investor” is offering a cash payout of 10% – 25% of the value of your home and no monthly payment is required. That would put $25,000 – $60,000 in the pocket of the homeowner with no change in monthly cash flow. Because the payout is considered an investment in return for partial ownership rather than a loan, the transaction is not subject to the standard mortgage disclosures that protect consumers. I’ve read the actual paperwork and it is confusing.
No monthly payments sounds awesome. It should not be assumed that just because there are no monthly payments that this product is a low cost source of funds. The investor is repaid with a percentage of the value increase when the home is sold and shares in any loss if the value declines (subject to caveats). It’s typically 30-70% of the appreciation, which could make the effective annual cost as high as 20%. If my Dad wrote this article, he would say something like: “The time you pay the most is when you think you’re getting something for free.”
One of the only positive byproducts of the financial crisis was the standardization of mortgage products. Lenders are required to make sure that borrowers can pay back the mortgage and prepayment penalties are nearly outlawed. This has made it easier for borrowers to avoid catastrophic errors. As the market changes and non-traditional mortgages & lending options become more complex, it is important to make sure you understand everything you sign. Seek counsel from professionals you respect and choose a lender you know and trust. And if you get an offer that seems too good to be true – remember what my Dad says – it probably is.
Aaron Nawrocki has over 20 years of direct experience overseeing mortgage and loan processes, working to provide clients the market insight and lending expertise required to make informed decisions.
Aryne + Dulcinea
Earth Advantage & ADU Specialist Brokers