The rapid decline in real estate market values seems to have taken mortgage lenders by surprise. After all, who in the world would lend money secured by an asset that will lose so much value in just a few years?
Yet institutions have been writing automobile loans for years with full knowledge that the pledged security will immediately begin to have a declining net market value.
So what’s the difference? Well, it’s a calculated risk. Those that lend money against vehicles understand the actuarial future value of the asset.
So why don’t home lenders take the same approach towards mortgage lending? Good question. Most will be very cautious when underwriting in areas of declining value. But they will rarely craft a loan to adjust to the risk.
If it means bigger down payments and shorter loan periods then so be it. The race of equity against debt has to be won in order to prevent homeowners from being upside down in just a few years.
The loss of equity has to be addressed. And the best way to do it quickly is to pay down principle as soon as possible.
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