Danger on Home Front

Cashing out home equity, more borrowers with bad credit records,
proliferation of interest-only and other non-traditional mortgages, Banks
allowing people to purchase more than what they can afford -- All these
causes are no doubt leading to a very risky real estate market. A time
may soon come when some homeowners may owe much more on their
mortgage than their home is worth.

To elaborate on this point, here are some highlights of a report from SMR
Research on current market trends in the mortgage industry:

-- In the first 6 months of 2005, about 38.1% of home buyers who
financed their homes did so with a down payment of 5% or less of the
purchase price. This is up from 30.6% in 2000. So, first-time owners
are owning much less of their home value.
-- The percentage of buyers paying the traditional 20% downpayment
fell to 33.7% of borrowers. This is down from 39.1% in 2000.

Usually (and that was a trend long back), lenders require that buyers
putting down less than 20% purchase private mortgage insurance (PMI),
which adds a couple of percentage points to their interest rates. Also, since
the premium for the insurance is not tax-deductible, it adds an extra
burden to home buyers.

However, in actual practice, only few of these buyers actually go for PMI.
Instead, they use what is called "piggyback" mortgages. Piggybacks
consist of two loans: a regular mortgage covering the first 80% of the
home cost, and a home equity loan or home equity line of credit (HELOC),
which pays for the rest. According to this report, Piggybacks now account
for 48.2% of all home purchase mortgage dollars, a stunning rise from
only 19.9% in 2001.

The use of so much leverage makes real estate markets increasingly
risky. If housing prices flatten out or decline, some newer homeowners
who have built up little equity, could find themselves in real trouble. And,
if interest rates rise, homeowners with adjustable rate mortgages may not
be able to keep up higher payments or sell the house for what they paid.
Foreclosures could spike and the supply of homes for sale may increase
leading to trouble time for the real-estate run!