“We are sitting on a time bomb,” the mortgage analyst said — a huge increase in unconventional home loans like balloon mortgages taken out by consumers who cannot qualify for regular mortgages. The high payments, he continued, “are just beginning to come due and a lot of people who were betting interest rates would come down by now risk losing their homes because they can’t pay the debt.”

He would have given great testimony at the current Senate hearings on subprime mortgage lending. The only problem is, he said it in 1981 — when soon after several of the alternative mortgage products like those with adjustable rates and balloons first became popular.

When Senator Christopher J. Dodd, Democrat of Connecticut, gave his opening statement last week at the hearings lambasting the rise of “risky exotic and subprime mortgages,” he was actually tapping into a very old vein of suspicion against innovations in the mortgage market.

Almost every new form of mortgage lending — from adjustable-rate mortgages to home equity lines of credit to no-money-down mortgages — has tended to expand the pool of people who qualify but has also been greeted by a large number of people saying that it harms consumers and will fool people into thinking they can afford homes that they cannot.

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WASHINGTON (MarketWatch) — For the first time in the nation’s history, a significant number of Americans are being threatened with the loss of their home even though they still have a steady, good-paying job.

It’s not just an issue for people with poor credit, those with subprime loans. It also affects people with good enough credit to qualify for a prime loan. Known as Alt-A mortgages, these loans were written for 1 in 5 U.S. mortgages and could have a big impact on the economy and on credit markets — bigger, perhaps, than the effects of the recent shockwaves buffeting the subprime-lender market, economists say.
  
In coming months and years, the credit crunch that’s now squeezing mainly the poor is likely to hit millions of middle-class homeowners who took out risky loans during the great housing boom earlier in the decade. More than 1 million families will lose their homes in the next few years, by one estimate. Another study predicts 2.2 million foreclosures.

This threat is new in American history. Its impact on the economy, and upon the American Dream, is uncertain.
In the past, homeowners have generally lost their home to foreclosure only when they suffered a major life-changing event, such as loss of their job, a major illness or death of a family member. A big jump in foreclosures was unheard of outside a recession that brought high unemployment.

But now, because of the recent popularity of loans geared to let people buy a more expensive home than they can truly afford, all it will take is the passage of time to trigger a default. At some point, all these loans are adjusted to switch from a low, subsidized monthly payment to the full amount required to pay off the loan.

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When home prices stopped going up 12-18 months ago, the frustration was palpable but hardly fear inducing. Timelines were stretched for ROI, ‘we’ll use it as a vacation home’ rationales started flooding forth, and travertine backsplashes suddenly went wanting. But things are different now, measurably so. And that difference is not just that the demand for credit to speculate on housing has declined. It’s that supply is now contracting. And when a credit cycle starts seeing supply contract (liquidity declining), all sorts of things start to happen: speculation gets robbed to pay a tax to prudence.

But, really, what has changed? What has really changed?

It’s not as if bankers don’t have money laying around to extend or sweeten the terms of the new loans these home speculators now need. Hell, the Fed and Treasury just need to print it into existence. And certainly Senator Dodd has played his cards: he thinks Congress should help 2.2 million home owners who are getting squeezed from buying a home they couldn’t afford in the first place (and apparently who are not English speakers also because existing federal regulations demand that every possible term and contingency in lending be laid out for borrowers). .

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Last month, a survey of the national appraisal industry conducted by October Research Corp. reported that 90 percent of appraisers feel pressure to inflate the value of homes to meet expectations — be it a purchase price or an estimated value for a refinance.

Of course, this isn’t the first time evidence of appraiser pressure has been aired. Just four years ago, during the boom, a similar study found that a full 55 percent of appraisers had had lenders, brokers or owners attempt to inflate their values. In 2005, Jonathan Miller, appraiser and bubble blogger, launched Soapbox to "vent" about the "pressure myself, my firm and my profession was under to make the number ‘or else.’"

"It seemed that no one really cared about ethics or the risk placed on [the] banking system," he wrote recently. "Appraisers were fast becoming the enablers to fraud and a whole lot of ‘gray areas’ that I wanted no part of."

In a boom market, meeting the expected price was not as hard to do. Everyone was making lots of money and less anxious about each individual deal going through. But now that sales volumes are down, re-fi fever has cooled and some markets have softened, mortgage brokers and even lenders try to set their target value in advance of hiring their appraiser. This leaves the appraiser caught between a house and a hard place.

"Internet-based mortgage companies call all the time," says Curt Thor of Real Estate Appraisals Association of Northern California and a Marin appraiser with North Bay Real Estate Appraisals for over 20 years. "They’re fishing for appraisers. They tell me what the number is and ask me if I can match it."

Thor says he typically won’t even look at such offers because if he can’t match the number once he visits that house, he knows he’ll find himself battling with mortgage brokers over being paid for his time. Once when this happened, he filed a complaint about the broker with the Department of Real Estate and copied the broker’s boss. "I got a check very quickly," he told me.

 
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