How Risky Mortgages Might Make You Money

August 10, 2016 No Comments »
How Risky Mortgages Might Make You Money

The recent trend of mortgage lenders requiring less and less money down might actually be a boon for investors everywhere.

In case you haven’t noticed, big lenders like Wells Fargo and Bank of America only require 3% down for a home purchase, and lately the number has dropped to 1% down thanks to other players like Guaranteed Rate and United Wholesale Mortgage.

Some large regional lenders like Fifth Third and BancorpSouth have even gone the no down payment route. While that might be troublesome for the housing market eventually, it could benefit investors for some time to come.

Why Loose Lending Might Mean More Investor Gains

The logic goes something like this: If borrowers can put less (or nothing) down on a home purchase, home prices will rise even more, perhaps more than they really should.

If home prices keep rising, homeowners will feel a lot richer, even if it’s just a gain on paper. When one feels richer, one is more likely to make risky bets on things like stocks.

That should push the stock market even higher than it already is, meaning even those completely against low-down payment mortgages and speculative housing plays could profit from the phenomenon.

This is a theory from an investor who uses technical analysis coupled with mass psychology to draw interesting conclusions.

If true, it means the housing market has a lot left in it before things take a turn again. The author notes that home prices are already on fire, without the wide-scale availability of zero down mortgages.

They argue that if/when zero down becomes the norm again, “one can only imagine” the gains homeowners will see.

I’ll add something they didn’t mention – cash out refinancing. If guidelines for cash outs are eased, thereby allowing borrowers to tap lots of their newfound equity, homeowners could be flush with cash.

If they spend the cash, it helps the economy. If they invest the cash in stocks, it leads to price increases. Either way, equities technically get a boost.

There’s a Major Hitch

There’s one really big problem with this line of thinking though. It will eventually lead to a massive stock market bubble, and equity prices (and home prices) will eventually tank as a result.

Essentially you’ve got this mix of low-down payment mortgages and a mentality where the homeowner thinks they’re better off than they really are. I suppose you can throw in super low mortgage rates to the mix as well.

This may lead the homeowner to become overleveraged as they make speculative plays with their surplus of funds.

The author notes that corporations and the “very wealthy” have already had access to cheap money, and once it finally trickles down to the common man, things will start to get really risky.

So it’s a short-lived win and one that will supposedly create another bust, but in the meantime it can lead to a lot more gains in what many see as an overheated stock market.

You just have to be prudent and not get burned in the process.

In summary, it’s no surprise really – everyone seems to get (appear) richer before things take a turn for the worse. And it seems we are still in the somewhat early stages here. Things are still relatively under control.

Just a shame that we continue to repeat the same mistakes over and over again.

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