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Mortgage mess and artificial value of real estate

By Cathy Moran

As each week brings a new wave of clients who have mortgages they can’t afford even before the loan resets, I ponder what happened in the Northern California real estate market.

While it has been practically a law of nature that California real estate only increases in value (despite not so recent evidence to the contrary), the increases over the past couple of years have been eye popping. With median home prices around $700,000, first time home buyers should be a very small subset of the population.

Yet the clients in my door have been middle income at best, yet they bought one or more properties with mortgages in the $700,000-$800,000 range. Almost invariably, they were told that the “friendly” mortgage broker would get them a better mortgage before the miserable one on the table reset. The ability to do that, of course, was predicated on a rising real estate market which would lower the loan to value ratio.

When you think about it, of course the real estate market was rising, when housing in the Bay Area is a limited commodity, and easy mortgage money has made practically anyone with a pulse eligible for a home loan and therefore a potential buyer. More people chasing fewer goods=price increase.

Of course the housing mania was also dependent on these buyers never having to make a fully amortized payment on a $700,000 mortgage. In most cases, the illusion of affording the house was dependent on mortgage “products” that required payments less than even the interest alone.

So, consider that the loss of value we are seeing, at least here in the Bay Area, merely represents the market wringing out the “value” created by mortgage madness.

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About Cathy Moran

I'm a veteran bankruptcy lawyer and consumer advocate in California's Silicon Valley. I write, teach, and speak in the hopes of expanding understanding of how bankruptcy can make life better in a family's future.

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Soapbox is a companion site to Bankruptcy in Brief, where I try to be largely explanatory and even handed (Note I said “try”).

Here, I allow myself to tell stories and express strong opinions. We dig deeper into how to consider bankruptcy and navigate a bankruptcy case.

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Bankruptcy specialists for individuals and small businesses in the San Francisco Bay Area

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