One of the things that made DC Metropolitan area such a breeding ground for predatory lending was the fact that there was such a shortage of housing, that buyers were willing to do anything to 'Get That House' that came on the market. Strategies such as waiving home inspections, and waiving appraisals were the norm.
Also, buyers accepted exotic loans as an alternative because it seemed like if you didn't go that route, you simply would not own a home. Buyers were enticed by 'teaser' rates. Teaser rates are low introductory interest rates that are fixed for a short period of time, usually 1-6 months. After the initial period, the interest rate could adjust monthly, and many loans offered buyers the option of paying a certain portion of the required payment, and tacking on the difference to the principal.
A recipe for disaster for those households were already walking a fine line when it comes to financial discipline. Add increased fuel costs, and you have the makings of a real estate market breakdown.
But wait a minute, was it always the lender's fault? It is ultimately the buyer's responsibility to read all of the documents pertaining to the loan...including the fine print. All buyers should understand exactly what their mortgage payment will be prior to closing. Buyers should also prepare themselves financially so that they have the means to pay their mortgage during the adjustment periods. These are some of the things that buyers learn during the initial consultation with the buyer agent, and the chosen lender. And all buyers have the right to receive their Good Faith Estimate of closing costs within three days of loan application. If the chosen lender does not provide this, then that should be a red flag.
In the Washington DC real estate market, a lot of buyers either sink or swim. Nobody likes sitting in traffic, so people are willing to pay more to live closer to the city. On the flip side, if you're spending $400,000 in Arlington, you're looking at condos and older townhomes that need work, whereas in Prince William and Stafford Counties, $400,000 equates to a single-family detached home with a 2-car garage, and yard space. What's a family of four to do?
One of the requirements for demand is scarcity. And we were facing a housing shortage. Homes were being bid up, and for many buyers, that meant stepping out of the traditional 30-year fixed mortgage, into an interest-only loan so to increase the purchasing power. Mortgage companies had to offer creative loan products just to stay competitive.
In many areas, we are starting to see sellers who are upside down on their mortgages, meaning that when they sell, they will be bringing money to the table. Also, many sellers can't afford to offer incentives such as buyer paid closing costs, which can increase time on the market. This, however, will open the door to pre-foreclosures, short sales, and bank-owned properties making their way into the open market. Where are the investors?