By John Ellison
President of HomeTech Mortgage

Why are there so many houses listed to be sold on the market? The mortgage industry experienced record low 30 year fixed rates in 2003. Many fixed rates fell below 5.5%. P. George Benson, Dean of the University of Georgia’s Terry College of Business recently stated in his 2007 State Economic Outlook that the extremely low fixed rates during this time created a market which allowed homeowners to buy houses that normally would not have been afforded and bought until later years.

In other words, with fixed rates being so low, the consumer qualified for a larger mortgage and purchased a larger home normally bought later on in life. Even though the increase in home purchases at this time was great for the local and state economies, it actually created a lull for future home sales…and that future is now.
This explains the slowdown in home sales, but why so many foreclosures? A recent report stated the foreclosure rate in Georgia has jumped a staggering 99% over the last twelve months compared with a national average increase of 42%. This statistic ranks our state third in the U.S. for foreclosure rates. Why such an increase over the past year?

Once again, in 2003, the fixed rate mortgages were at a record low. The adjustable rate mortgage (ARM) was even lower. Many consumers were/are unaware that an adjustable rate mortgage was initially created to “give relief” to the homebuyer when fixed rates were/are high. If you don’t remember or you are too young, just ask your parents about the early 80’s. I’m sure they haven’t forgotten those rates.

In 2002 and 2003 when fixed rates were beginning to fall, a handful of mortgage lenders “assisted” consumers in stretching their home buying affordability, allowing them to purchase a larger home using certain “creative financing” adjustable rate mortgage (ARM) options. Most of these mortgages were marketed, sold, and closed as being fixed for only a 1 month or 6 month period of time. During this same period, fixed rates were at an all time low. Initially, these specific short term ARM products were created for the small percentage of homebuyers who could basically pay cash for a house. Yet, these mortgages were deliberately presented and sold to the other 98% by some overzealous mortgage companies presenting precarious assumptions and far fetched theories of the real estate market. In reality, these companies sold short-term products to long-term homeowners. Remember, with these homeowners buying one or possibly two homes ahead of what they would normally be purchasing, the obvious mortgage choice would have been a long-term, conservative loan (fixed rate).

Mortgage companies selling extremely high-risk loans with an interest only payment coupled with no money down, 100% financing equals formula for future financial disaster.

Once again, that future is today and it’s only just the beginning. As these adjustable rate loans start changing to today’s market, many homeowners simply cannot make the minimum monthly payments and are left with few choices, especially in a slower real estate market. Hence, the 99% increase in foreclosures.

About 15 years ago a wealthy man told me the average American consumer is in trouble when he purchases a car based solely on the monthly payment and not the actual cost. Now many of our neighbors have the same mindset with houses! The bottom line is simple. Learn from other’s mistakes. Do business with people you know and trust. Select the real estate agent, accountant, financial advisor, attorney, and mortgage broker that puts your best long-term interest upfront…..not theirs.

John Ellison is President of HomeTech Mortgage Corporation located in Tyrone, Georgia. He has been in the mortgage industry for 16 years and closes residential loans in Georgia, Florida, and Alabama.

login to post comments