Who is really at fault?  The housing pull-back (or as others refer to it “crash”) has had a substantial impact on the financial health of this country.  Most news and TV correspondence have painted this as the end of the world.  I agree it is a bad situation, but not one that is a surprise or the end of the world.

While I don’t like seeing a decrease in the housing sector, it is necessary for a healthy market to have pull backs.  This pull back is larger than others only because housing was artificially inflated by high demand as a result of low interest rates and easy to obtain loans.  How can one complain that the market is in a dive bomb when it was substantially over inflated in the first place based largely on demand from individuals that could not afford the house they bought?  Really is this a surprise?  A simple calculation can tell you that a family making under 70K per year can not afford a 500K house no matter how good their credit is with little down, but with the loan products out there they were able to buy one.  Or how about the real-estate investor who bought 3-5 units that were break even on a 5 year or less ARM.  I hope these people had reserves to account for the change in payment after the initial period.  Even to this day, I hear advertisements for investment properties that “cash flow $500 per month for the first year with only 10% down!”.  Yeah right.  What happens after year one?  Negative cash flow of $1,000?  These are crap loans designed to lure people into an investment that don’t understand all the details.  If you buy investment property on a variable loan, you are just asking for a bad situation.

I read several articles that blamed mortgage brokers.  I don’t really understand this argument.  Yes there are many unscrupulous ones, but in most cases, as a consumer you can compare rates from any bank, online service, or other mortgage broker to make sure you are not getting a bad deal.  You also have the ability to read the papers you are signing.  For this reason, I can not lay blame on the mortgage brokers, even if they did practice bad lending policies.

I believe that a majority of the problems start at the banks themselves.  Lowering lending standards, allowing no documentation loans, and allowing ARMs to families that could barely afford the lower introductory rates.  There was almost no checks and balances.  It did not matter how bad your debt to income looked as long as your income could support the low fixed interest only payment (in some cases income did not even matter).

However, they should not bear all the responsibility.  The buyer should take responsibility as well.  If you do not understand the loan, if you have not shopped around, if you have not read all the terms, and if you have not taken the time to figure out what happens at every point in your loan’s life, you should not have signed the papers.  To many buyers were under the illusion that housing prices would stay level or increase in value every year which would always allow them to refinance their loan after the fixed period ended.  This is absurd.  It may continue for a long time, but what if?  The problem today is that we have reached that what if and buyers can not refi a house that is upside down in value.  I hate to say it, but unfortunately this frenzy made a lot of people money that probably did not need it and bankrupted a lot of honest people trying to provide a decent life for their family.

This mess is causing a lot of pain right now, but on the positive side, it is bringing housing back in line with where it should be.  Double digit gains year over year are not sustainable and are unhealthy in any market.  While there may not be an easy or immediate solution, housing over the long term will come back.  Buying a house may or may not be a good idea now, but with low interest rates and a 20% haircut off most markets it may not be a bad idea to begin a new strategy.

If you are looking for a new loan, here are a few tips to take into consideration:

1.    Always read everything!  I don’t care if it takes two entire days, read it, understand it, and if you don’t ask questions.  The terms are not always set in stone and can often be modified if you find something that is unreasonable.

2.    Pick the right loan for the right reason!  Don’t pick the interest only because that is what you can afford.  If that is the case, then the house is to expensive for you.  Picking a lower interest ARM is really only good for one thing, lowering your principle loan balance faster than a traditional loan can.  However, it is a gamble because you do not know what interest rates are going to do.  If you take this strategy take the time to model out how the reduction in principle offsets the increase in interest.  With some reasonable assumptions, you should be able to figure out a good break even point depending on what you anticipate interest to be.  If you don’t know how to model out a payment schedule, find someone that knows how or look at some of my previous posts.

3.  Shop around!  There are a wealth of sites and places you can go to apply for loans.  If you are using a broker, call a different one and see if they can meet or beat the current loan offer you have.  The more bids you get out, the easier time you will have finding out what a fair loan is based on your situation.

4.  Be smart and check BBB and consumer reports!  If using a broker, take the time to research for any negative comments.  Odds are, you will find some and see what the complaints were.  Depending on what you find, you can ask how the broker how they resolved the issue or not do business at all with them.

5.  Know your facts!  That is, know you credit score, know what you can afford, know your back up plan if things get tough, and most importantly know your habits.  If you can not stick to a budget don’t get a house that requires a loan that will put you in a situation that requires tight money management.  A nice big house is great, but if you don’t have any flexibility for travel, entertainment, or living, what is the point of having the nice house?

These are just a few tips, but I hope that you find them useful on your next home purchase.

What are your thoughts on the current housing problems?  Who is at fault?  What is a good solution?  Should the tax payers bail people out?  Should the CEOs with big bonuses pay?