- The Washington Times - Friday, November 27, 2009

Today’s column is probably not appropriate to be published the day after Thanksgiving, a time when we give thanks and express gratitude. It’s been almost a year since mortgage rates took a sharp downturn, fueling the demand for refinancing and adding at least one lump of coal to the tiny fire under the housing market.

It’s safe to say that mortgage rates haven’t been as low as we’ve seen in 2009 since the early 1960s. Normally, such conditions would kick-start the housing market and spur a refinance wave that would save homeowners millions of dollars, which eventually would be spent on our anemic economy.

I want to share a real-life situation. I recently approved a young couple for a mortgage loan guaranteed by the Federal Housing Administration (FHA). They are in their late 20s, have one small child and another on the way. They are educated, with professional jobs, a savings account and good income and credit.

In 2005, they purchased a condominium with a 3 percent down payment. Their plan at the time was to sell and move up within five years.

Just four years later, the condo is worth $100,000 less than what they owe on it. They approached me to get qualified for a new home. I told them that because they have not rented their existing condominium, we must count that payment against them to qualify for their new loan.

After a bit of number crunching, I approved them for a $335,000 FHA loan that is enough for a modest town house. If they were able to sell their condo, they surely would qualify for much more.

When I asked these folks how much rent they might be able to get from the condo, they confessed that they are prepared to ruin their credit and walk away from the condo after they purchase a new home. Apparently, their current lender refuses to talk to them about any kind of loan restructuring on the condo until they are way behind in their mortgage payments (with their credit already in ruins).

Since then, they have looked into the effects of foreclosure and have had a change of heart. They are looking into the plausibility of renting their unit and maintaining their good credit.

They also are considering my advice, which was to lower their living standard and remain in the condo, reduce their expenses and save some serious money. While the real estate market surely collapsed, it also will recover.

This couple is one of thousands or perhaps millions who bought real estate at the wrong time and have a negative net worth a few years later. Most people expected property values to continue to increase at a double-digit pace. Who would have thought that a condominium would be worth a third less just four years after it was purchased?

I wrote several columns in 2004 and 2005 warning folks of the “irrational exuberance” surrounding the housing market. At the time, buyers were offering full price with escalation clauses. They were waiving the most basic protections, such as financing and home-inspection contingencies.

At the risk of getting clobbered by the real estate sales community, I recall that many professionals - but not all - wholeheartedly encouraged folks to ratify contracts under virtually any conditions.

While market forces may have created such an imbalance, I recall telling potential buyers that the conditions were not sustainable and that they must realize the possibility that they were buying at a cyclical peak. I told them to be prepared to hold the property for longer than they planned. Real estate values generally will rise over time - but not without dips.

Meanwhile, lenders and banks continue to resist working with troubled homeowners unless their credit is already ruined. The new, stricter rules set forth by government-owned mortgage giants Fannie Mae and Freddie Mac are making refinancing and purchasing far more difficult than they need to be. And the new appraisal rules are causing inaccurate values that are killing deals at the starting gate. Don’t expect a quick recovery.

Henry Savage is president of PMC Mortgage in Alexandria. Reach him by e-mail at [email protected]

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