Risky Lending is Back!

Real Estate Agent with Century 21 Superstars


Today at my weekly morning office meeting a representative from Wells Fargo was reviewing all the different loan programs that are available to our buyers. As he reviewed the programs one in particular caused murmurs and quick remarks to each other under are breath. To give you some back ground our office meeting has 50 plus real estate agents, a couple of bankers, a few title insurance reps and various venders. The Wells Fargo rep is a well respected and trusted banker that is a fixture in our office and the Orange County real estate market. 

The loan program caused such a reaction because it has haunted many, many people and in my opinion was the beginning of the end for the country's real estate whoes. Ever since the banks risky lending practices led to the financial meltdown the banks lending attitude has been very conservative, basically only giving 30-year fixed loans and making the borrower qualify for the whole payments including tax. At the extreme end of the scale just a few years ago you could get a loan based on a payment that was temporarily low for a few years. When the payment went up it didn't matter if you could afford it anymore. 

Well, it's back. Today Wells Fargo announced that it has a 5/1 ARM and will qualify you based on the teaser payment. In simple terms your first 60 payments or 5-years are a lot lower than your last 25-years payment. This alone is not the issue, when the bank allows the borrower to qualify for this loan based on only the first 60 payments is defiantly a problem and in the risky lending category.

I would have bet you a million dollars that the banks would never ever do this type of lending again in my life time but, here we are. I just hope that this type of lending doesn't get out of control again. This is exactly how it started almost 10-years-ago.


Comments (4)

Gary Swanson
Century 21 Harris & Taylor - Grants Pass, OR

Brent, and here I thought we were learning from our mistakes.  It looks like some lenders have short-term memory loss.

Feb 02, 2010 04:12 PM
John Pusa
Berkshire Hathaway Home Services Crest - Glendale, CA
Your All Time Realtor With Exceptional Service

Brent, It appears that the banks need to generate more business. Thanks for sharing a good blog.


Feb 02, 2010 04:14 PM
Dan Tabit
Keller Williams Bellevue - Sammamish, WA

Brent, I saw this originally as a Re-Blog and wanted to copy my comment here.  I'm a Realtor and a Licensed Lender and have been doing Mortgage for 12 years.  ARM's offered by today's major lenders are not going to be the problem. 

There are many very good reasons to consider an ARM, and these alone weren't the problem.  The sub-prime ARM's which were 2/1 & 3/1 and available to 100% LTV for borrowers with scores as low as 560 were.  Currently you need a 620 score or greater and 100% LTV is not available. 

I've used ARM's for years and when well explained and thoroughly understood by the right buyer in the right situation they are perfectly reasonable.  Within 5 years some people may anticipate a relocation, job transfer, substantial increase in pay, just as a few examples.  While these do start incredibly low, I have 3.5% note rate available, they cap out at 8.5%, or usually 5% higher than their start rates. 

If I have a client who anticipates a move within 5 years, we might look at a 7/1 ARM.  In either event, we go over the worst case scenario and typically they are money ahead for 7 years or more on the 5/1 and 10 years or more in the 7/1. 

Qualifying for these loans, like all others is much stricter than it was when everything fell apart.  I welcome them back as a benefit to the consumer who, if properly informed can use these to their advantage. 

Feb 02, 2010 05:59 PM