It’s not the end of the world, but it’s worrisome.  The implosion of the mortgage market will be the way we in the real estate industry remember 2007.    The state of affairs is the product of many hands and the cause is age-old: greed.  In the great housing boom of the early 2000’s, no one wanted to be left out and everyone wanted to make as much money as they could.

 The mortgage industry invented instruments that allowed the purchase of more house than would otherwise be possible; interest-only mortgages, payment-option ARMs and other exotic instruments became commonplace.

 Buyers themselves were often complicit when they overstated income to qualify for ever larger loans.

 And Realtors bear responsibility because they sought out loans with the cheapest monthly payments and accepted whatever the buyers wished to represent as their financial condition.

We now have about $1 trillion worth of loans that will ‘reprice’ this year–the interest rates and therefore the monthly payments will rise.   While the overwhelming majority of homeowners have sufficient credit and equity in their homes to withstand the change, others will be unable to adjust and will be forced into foreclosure. 

For the real estate market, there will be two major consequences.  First will be the glare of adverse publicity.  The absolute numbers of foreclosures will be small–the foreclosure rate should increase from about 1.25% to 2.5%–but the headlines will read “Foreclosure rates double!!”  Second, regulators will come down hard on the lending industry, sharply increasing qualifying standards and eliminating exotic mortgages.  This will make it harder for buyers to qualify for financing.

The economy as a whole will feel the impact because even homeowners who can afford the mortgage rate adjustments will need to reduce comsumption of other goods–fewer dinners out, the car will have to last another year, more DVD rentals and fewer visits to the theater.  Since consumer spending is 2/3 of Gross Domestic Product, this translates to a lower growth rate in an economy that is already underperforming. 

Economists like to say there is no free lunch.  We thought we had it a few years ago: ever-appreciating houses paid for by mortgages that demanded low payments.  We feasted then and we’re paying now.  Hope it’s not at an exorbitant price.

This posting has been paraphrased from an article by John Tuccillo, former chief economist for the National Association of Realtors,  and one of Tupper’s heros.