How Special Situations Became Dominant in Mortgage Lending
The term special situations has a lot of meanings when referring to the mortgage market — they change as quickly as the market itself. Five years from now, there may be mortgage products on the market that don't have any direct connection to the ones written about at the time of this book's publication. Essentially, a special situation in mortgage lending refers to practically anything other than a plain-vanilla, fixed-rate conforming-limit mortgage of $417,000 or less in the continental United States. (That limit rises to $625,500 in Alaska, Hawaii, Guam, and the U.S. Virgin Islands, where housing costs are significantly higher.)
As this book was in production in fall 2007, the biggest area of growth was in the super-luxury mortgage market where multimillion-dollar mortgages were the norm. Why? Because during the post-2006 housing debacle, the rich stayed rich and stayed in the market. Credit scores of 760-plus and big incomes began to dominate the market once the credit-challenged middle class began to drop out.
What is secured versus unsecured debt?
Mortgage and home-equity debt is generally considered secured debt because such loans are made based on the total market value of your home. Credit card balances, signature loans from a bank or credit union, and convenience check loans are considered unsecured because these loans are made without collateral.
During the third quarter of 2004, the U.S. Office of Federal Housing Enterprise Oversight (OFHEO) home-price inflation rate hit a twenty-five-year high of 12.97 percent. That double-digit number was dwarfed by considerably larger increases in the Southwest and other parts of the country. In May 2007, the OFHEO said its housing price index grew only 4.3 percent in the first quarter compared with the 2006 quarter, putting its growth rate at the slowest in ten years.
What do these housing figures mean? The security of growing equity — the element that makes lenders more sanguine about lending money and borrowers more confident about taking the plunge — makes the mortgage industry run. The galloping gains in housing prices since the 1980s created a hunger for real estate and a variety of products to serve all ends of the market.
The products described in this chapter are now part of the everyday borrowing behavior of most Americans who have gotten involved in real estate. Yet, as much as some of these types of mortgage loans and related credit lines have significantly lowered the cost of borrowing and entry into the real estate marketplace for many Americans, they have also transformed the once-sacrosanct asset of home equity into cash for a variety of purposes — many of them risky.
