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Risk In The Mortgage Market -- One Man's Experience Shopping For A Loan.

Based on personal experience in one small market, I have a perception that mortgage risk is being tempered more by borrowers than by lenders and a substantial quantity of risky loans are being made.

The Story

One day, recently, my wife and I went into the local credit union to talk about a home loan. The credit union has a reputation as a good place to do business, but every builder and real estate agent in the area as their favorite "preferred lender" who can get you a better interest rate and loan you more money for lower closing costs. We like dealing with our credit union, and the value always having somebody local we can talk to about the loan is very useful -- the credit union does sell some mortgages, but they don't sell servicing rights, so you always deal with the credit union. We've been through enough "adventures" in life with other banks that having somebody local to talk to face to face is probably worth 1/8 of a percent.

We spoke to the bank's agent. I think her official title is has something to do with "originator". She looked at our information. Discussion ensued about how much house we wanted, etc. Upshot is the credit union will loan us a lot more money than we're willing to borrow. My wife and I both found the maximum number rather scary -- no way we would be comfortable owing that much. Yes, we'd like a house like that, but retirement is a much higher priority.

The originator noted that she talks to two types of potential borrowers in recent months. The first group is much like us -- rather shocked at how much the credit union is willing to lend and not interested in anything near the maximum amount. The second group wants to borrow every penny and then stretch. She described it as a barbell. Apparently there is nothing she would consider a middle right now.

We walked out of the credit union and I said to my wife something to the effect, "If that's what the conservative Credit Union is willing to loan us, I understand why the big,aggressive, banks are in trouble." My wife agreed.

Since that time, we have spoken with some of these other local "preferred lenders". The rates are indeed 1/8 to 1/4 of a percent lower than the credit union. The maximum amounts available are greater even adjusting for the difference in payments.


We live in North Alabama. A lot of the economy is based on Redstone Arsenal -- military logistics, military space and rocket programs, and Marshall Space Flight Center (NASA). The housing market here was overbuilt in anticipation of base relocation in 2007. However, because of that base relocation, and military employment, the housing market here probably didn't get as bad as in much of the country. At the same time, recovery here may be slower in anticipation of military budget cutting.

Huntsville is a relatively inexpensive market. Prices here area half to a third those on the coasts. You can buy a nice -- not fancy -- 2100 sq ft home for $150-200K and 3000 sq ft homes with the works can be had under $300K.

Production builders are building again -- slowly. We hear many stories of finally selling a previous home, often in another state, and getting out from under the double mortgage situation. This is allowing people to move out of apartments into homes, and from lower priced homes into upscale homes.

Opinions and Conclusions

In my opinion, the supply of newly constructed homes in the area is and will remain sufficient to prevent price appreciation of existing homes for the foreseeable future. The new homes are being built with all the bells and whistles. The resale value of an existing home is limited by the cost of building a new home and the supply of land, subdivisions, and builders is endless. Just as cars depreciate the moment you drive off the lot, homes here depreciate the moment the moving truck arrives.

I know I'm only one person looking at a rather small sample in a small and potentially atypical market. However, I find it rather scary. My perception is there are a lot of stretch loans being made in an unstable economy. Originators are captive to the builders who want to sell as much house as possible. Many of these stretch borrowers will be fine if nothing goes wrong -- they stay employed, don't get sick, don't get divorced, etc. I've been around long enough to know things do go wrong. I also see employment in this economy as unstable -- continuous employment is not guaranteed even for those who are very employable.

This is a cautionary tale about my experience shopping for a loan. I believe lenders are not requiring borrowers to have a margin of safety and I suspect risk is being limited by borrowers more than by lenders.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: One man's experience in one small market.