There are two new trends that are beginning to emerge in the financial industry and both are troubling. Some insist new mortgage approval processes could further divide the nation’s most affluent and those who continue to struggle from a financial perspective. The second trend could make it difficult for those looking to ensure their futures by earning their college degrees.
No Money Down Mortgages
First up, there’s not an financial analyst worth his salt who doesn’t recognize the role “no money down” mortgages played in the financial mess that hit just before the recession. These 100% LTV mortgages were given out quite freely a few years ago and as we are all painfully aware, it, along with stated programs, were major contributors in what ultimately happened. Now, though, it appears these loan products are making a new appearance. This time, though, instead of subprime mortgages, lenders are enticing a more affluent consumer with no money down mortgages. Now, some are concerned this is just the first step towards another meltdown as lenders continue to compete for homeowners and each undercutting the other. Still, banks are adamant in their belief that these mortgages are safe, provided the buyer has no shortage of other assets.
There is one distinction, however, that sets these loans apart from their counterparts of a few years ago. Collateral – and massive collateral at that – is now being required. Usually, it’s the property itself and a handsome chunk of the applicant’s investment portfolios. It’s being reported that the right portfolio is all it takes to get that 100% LTV mortgage.
Typically, these are plain-jane one loan, one monthly payment mortgages. Usually, banks and other lenders require an asset pledge of around 20% of the home’s value (not the actual loan amount) and it could go all the way up to 40% for some borrowers. The pledged assets can remain fully invested, earning returns as normal while never compromising the homeowner’s investments.
Of course, there are those who insist these new policies will further separate the nation’s wealthiest from its less affluent counterparts. It gives those with the right assets – and the most cash – the opportunity to buy without having to let go of that cash or having to withdraw it from those accounts that are earning money for the homeowners. Figure in all of the interest considerations – interest they’re still earning on money they’re not being forced to part ways with and low interest on the mortgages themselves, it could be many of these homeowners, if they play their cards right, could create even more wealth.
And don’t forget the tax advantages. Remember, they’re bypassing capital gains taxes because they’re not being forced to liquidate those assets but they’re also able to take advantage of tax breaks in their mortgage interest.
Citibank Managing Director Peter Ferrara said,
Demand is two to three times what it normally is.
It’s also expected to increase in the new year.
So – with the high credit scores, low debt loads and the right assets, it could be you never have to open your wallet to buy a house.
Student Loan Delinquencies
The second trouble trend is a slowdown in student loan repayments. A full 50% of student loans in this country are now in deferment or forbearance. Borrowers simply can’t afford to repay their loans right now. They’re citing financial hardships, a tough job market and overwhelming credit card debt.
Last year, 77% of the total money owed in student loans had been postponed. That totaled $388 billion over just a few years time. It’s expected to be even higher this year when the report is officially released. There’s also been a 10% increase in these delayed payment plans in just five years.
The good news is by postponing the loans, there exists an opportunity for these young adults to prevent their credit history from taking a hit. The question is, though, how much longer can these loans stay in a holding pattern? The nation is drowning in debt, unemployment is up again and the economy is actually shrinking. This isn’t the ideal recipe for better opportunities.
Are these options really wise? Mark Kantrowitz, who publishes FinAid.org, says not really,
it’s not a good fix because you’re just digging yourself into a deeper hole.
In a strange way, because so many of these loans are sitting dormant, the government is actually earning more interest. And if those loans actually do go into default, the government can garnish paychecks or bring third party collectors into the mix. Worse – the government can actually garnish social security benefits.
Interest Adding Up
When these loans go into a state of deferment, there are a lot of facts they’re not made aware of. The interest is steadily racking up and these borrowers are often shocked once they’re able to get to the business of paying down their debt. The delays pose problems, too. Almost 6 million Americans between the ages of 40 and 49 are still paying on their student loans from decades earlier. A decade ago, those who were in this age bracket was 3 million.
So far, the only potential solution is found in the fed’s Pay as You Earn program. This repayment plan is an alternative that could lower the monthly payments for some borrowers. It limits payments to 10% of a borrower’s discretionary income and forgives the remaining balance after 20 years of regular repayment (or 10 years for those in public service).
These two trends have the potential of inhibiting economic recovery. What ultimately happens is going to depend a lot on the American consumer, whether it’s the wealthy CEO with impressive assets that opens doors for buying a new home or the 25 year old who’s struggling to land a job that makes his college degree worth it, there are many factors that will lend to further problems or ultimately the solutions that include getting past these tough economic times.
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