Monday, October 29, 2007

Why you can't find the 125% loan these days

For awhile one of the more popular residential products was the 125% loan.

While borrowing more than your home is worth sounds approximately as entertaining as playing with dynamite, it was a great deal back in the day (i.e., 2006, when dinosaurs still walked the earth) for those people who had 5 figures worth of credit card debt. The total payments would drop and cash flow would improve. For homeowners who were committed to staying in their houses for the foreseeable future, it was a way out.

Those loans are effectively dead, and this entry from the Market Oracle shows you why. In painstaking detail it shows how the theory behind the second mortgage went very wrong, and how the market in collateralized second mortgages absolutely collapsed.

While the article contains some hyperbole, it's an accurate asseesment of how a good lending tool went bad.

For entrepreneurs, it all means one thing: the housing market in the US has a long way to go before it gets better. Lenders will be eager to write good loans to businesses, but it's important to get in on that at the ground floor, and not buy an office building or a gas station at the top of the market.

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