COMPARING 2022 LOANS TO 2006-2008 LOANS


There are many people today asking the question, “Are we headed for another 2006-2008 Recession?” Of course, nobody has the answer to this problem and many pundits are predicting the end of the world as we know it.

However, the problems years ago were caused by the lending practices of the financial industry. This was from the bottom of the chain with newly licensed loan originators to the top of the chain with Lehman Brothers and others. At best the lenders were incompetent and at the worst they were dishonest.

Think back to many of the terms used then. Subprime loans, NINA (no income, no assets), payment shock, ARMs, teaser rates, Indy-Mac, CDOs, 30 day adjustment periods, No-Doc Loans, MBSes, up front fees, nothing down, country wide, negative amortization, resets, predatory lenders, New Century, NINANJ (No income, no assets, no job), you can refinance in a year, etc. etc.

Are there problems today? Of course. The interest rates have skyrocketed and home prices are going down. Already many owners are underwater (when you buy a home for 3.5% down you are underwater the day you close). The last big rodeo is over, and the runup was marvelous. Time to take a timeout and think things over.

There were two new terms set by the controversial Dodd Frank Act: Qualified Mortgages and Ability to Repay. The best description of QMs is from the Consumer Financial Protection Bureau, “A category of loans that have certain less risky features that help make it more likely that you’ll be able to afford the payments.” Most of the current loans on homes are QMs.

And before making a loan the lender must make a good-faith effort to determine that the borrower has the ability to repay. This was not done before the last Recession.

So I may sound like Dr. Pangloss from Candide and a little na├»ve, but let’s start planning and be ready for 2023. It is coming soon.

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