Economy no reason to forgo home ownership

The troubles on Wall Street are no reason for the average prospective homebuyer to panic.

"There is no reason to worry if you want to buy a house. The rates right now are quite good," said Mike Sante, Chicago managing editor of interest.com, a subsidiary of bankrate.com, the Internet site dedicated to financial analysis and information.

"Most people who have reasonable credit are getting the money they need at a great rate. The average fixed rate mortgage right now is just over 6 percent," he said.

"Anytime you can get a mortgage for less than 6.5 percent, that's great. Break out the bubbly!" Sante continued.

But what about the troubles on Wall Street?

"Lehman Brothers and Merrill Lynch are paying for the unprincipled lending binge they went on in recent years," he said.

"They were both knee-deep in writing subprime loans, which people had no hope of repaying and then they were packaging those bad loans and selling them off to investors because they were raking in big fees for doing it," Sante said. "They had no regard for the investors or the people taking out those mortgages."

As early as 2000, The New York Times and ABC News did a joint study, Sante recalls, that found Lehman Brothers working with First Alliance Mortgage in California, a company that later settled charges of predatory lending.

"First Alliance was writing bad subprime mortgages which they knew people couldn't repay and Lehman Brothers was trying to profit from this predatory lending. Now they are reaping what they sowed," Sante said.

What about the government takeover of Fannie Mae and Freddie Mac?

"Fannie Mae and Freddie Mac are the sources of most of the mortgage money in this country. That is why the government couldn't let them fail. Without them, the mortgage market would have collapsed and housing prices throughout the country would have plummeted because how much your house is worth is based on how much people can borrow to pay for it."

How did this crisis happen to the mortgage market?

Sante said homeowners were subjected to incredible marketing campaigns with lenders telling consumers they could buy a house or refinance their existing house with these incredible deals. More than half of the people who agreed to these loans have been foreclosed on got them through refinances, he said. They were often lured away from solid mortgages at fixed rates into loans with terms they couldn't understand.

"The brokers were even marketing to people who didn't need the 'no document' or exotic loans. These people could have gotten better loans because they could document their income, but they just succumbed to the slick and heavy-handed marketing.

"Consumers thought that the banks wouldn't loan them money that they thought they couldn't repay. What they didn't know was that the banks didn't care. They weren't going to hold on to the loans and collect the payments. They were passing them on to investors.

"And all of this was aided and abetted by a regulatory breakdown on all levels. Now the government is working diligently to set it right but this is a classic case of shutting the barn door after the horse has escaped. Investors woke up and realized what was happening when the foreclosures started piling up and they stopped buying what Lehman Brothers and others were packaging. That left these investment banks holding a significant number of loans they couldn't package and sell, so that is why they are failing now."

What is the state of the mortgage business now?

"It is in a shambles from top to bottom. Lenders are going bankrupt. Mortgage brokers are going out of business. It is hard to imagine how the mortgage business could be much worse."

What changes have been made in mortgage lending procedures to prevent future difficulties like the current rash of foreclosures?

All the banks have done is "return to sane lending practices," Sante said. "They are once again acting like they are loaning their own money instead of someone else's.

"You have to have a credit score over 700 again, and that isn't tough because the average credit score in this country is 730. "You have to be able to make a down payment of between three and 25 percent. And you have to be able to prove that you make enough money to repay the loan. They are going to ask you to document your income, assets and debts."

During the boom time of 2005 and 2006, in particular, lenders were making loans to people without documenting their income. So loans were written based on inaccurate information, he said.

Are these changes good for consumers and the marketplace? Why?

"This is great for consumers because there is lots of money available at a price they can afford. And no one is trying to sell those exotic loans anymore.

"We are back to the meat-and-potatoes loans with reasonable terms that don't get people into trouble."

What do you see in the future of the mortgage industry?

"I think that we will hit bottom with foreclosures this quarter and the number of new ones each month will start falling in the fourth quarter. And a Freddie Mac economist just said the other day that he sees mortgage rates staying below 6 percent for the next year, so mortgages should be very affordable for the foreseeable future.

"People will begin coming back to the real estate market and buying because they can now afford the houses and the loans again."

However, Sante said he does expect house prices to continue to fall over the next year before stabilizing.

"The bad lending is being rung out of the market. We are nearing the end of that. But I can't tell you what will happen with the broader economy. A recession could cause prices to fall even more."