Who Really Has Our Back in the Housing Market?

It is safe to say that the housing market today is a complete mess. In Washington, politicians are jumping to blame each other for the boil that is the subprime housing crisis. So, who is really to blame? Is it Congress, mortgage companies, the consumer? I can tell you who it is not...the consumer. Reading articles and blogs have revealed just how un-informed and financially illiterate people actually are. Hold on a second...this is not meant to be an insult. There is no law that says you need a bachelor's degree in finance to own a home, you just need to understand the people that are actually there to help you, and the people that are not.

The first myth is that consumer's were buying $300,000 homes and could only afford $100,000. That is not all together true. The subprime market was not designed to get poor people into mansions, it was designed to get a desirable mortgage payment for those who did not qualify for a low-interest fixed rate mortgage. The problem was they way the mortgage companies explained these subprime loans to consumers.

The two absolute worst subprime loans were adjustable-rate mortgages, and interest-only loans.

Let's start with adjustable-rate mortgages. These were by far the most popular. The pitch is that the interest rate is obscenely low, and there is a teaser rate, also low that will adjust with the market during a set time period. Most people could comfortably afford the initial payments, maybe even the first two adjustments, but when that third adjustment comes is when all hell breaks loose. People had a general misunderstanding about the way these mortgages worked. The initial interest rate was the floor, or the lowest the interest rate would ever be. So while 3.5% interest rate looked good, before the end of your mortgage term your interest rate could jump as high as 11%. That was the problem. When the interest rate jumps the mortgage payment can jump as much as 150%. In other words, you are used to paying $575 a month and then when your interest rate changes your payment changes to over $1400. Most people cannot afford such a large jump in a short amount of time, therefore causing defaults and foreclosures. That is the direct fault of the mortgage broker, and the mortgage lender, not the government.

Now that we have explained that option, lets talk about the less popular, but just as disasterous interest-only loans. The way these work is you pay the bank off first. You begin to pay on the interest portion of the loan before you pay on the principal. In traditional fixed-rate mortgages, you pay a portion of principal and a portion of interest in your monthly payment. Because you are paying on interest, which is the least expensive part of the loan, your mortgage payments are low. The problem is you are not building any equity in your home. In other words, you are basically paying rent. Don't think that is the only problem. Fixed-rate mortgages are meant to spread out your principal so that you pay an even, comfortable payment. But when you have an interest-only loan, there is less time to pay the principal, therefore making your payments climb higher and higher. This also causes a large amount of defaults and is the direct fault of the mortgage brokers and mortgage lenders.

Who do you trust? Who has your back?

The answer: You do.

There is a term called fiduciary responsibility. You need to know that mortgage brokers and mortgage lenders do not have fiduciary responsibility. In other words, they do not have to put the needs of you before the needs of themselves. Here, my friends, is the underlying cause of this problem. If the government had regulated banks and mortgage brokers to have fiduciary responsibility, they could be held directly responsible for the outcome of your mortgage. Mortgage brokers and lenders would be required to warn you of the outcomes of these loans, and they would be required to find the best loan for you...not for them.

If you learn nothing from this article, just take away that the mortgage brokers and lenders are not your friends. In fact they are your mortal enemy and should be treated as such. They say they look for the best loans to match you, but that is not true. Know that the more you pay, the more mortgage lenders and brokers get paid. It is you against them, and I hope you find yourself on top. It's all about what you know.