30 vs 15Y Mortgage & How did they invest before these low rates?

Question

So 30 years is better than 15 since you can pay off the 30 faster if you want too anyways and have a lower payment. Rack up all the good debt weapons now since the rates are at such a historical low, have a lower payment to afford more loans.

My question is, how did people and investors do it when there were 80/20 loans just before the recession? What were the terms then, 20% at 12%, the 80 at 7% i think it was. How were and had deals to be structured different  then they are now, what were the margins for profit and mortgage handled? Interested if someone could talk about that, since these rates now can not stay that low forever, what could we be looking at in the future judging by the past. How did you veterans still make a deal work back then? Knowing that people had invested for centuries even at those high past rates, I wonder how this can be a long term game when rates go back to these 80/20 loans.

Thanks.

Andrew Postell · Answer

@Rijm D. lending before the housing crises was COMPLETELY different than it is now.  To elaborate on this would take HOURS but in many cases buying at 100% of value didn't matter because your property value increased $20k in 6 months.  Or you might have received a REVERSE amortizing loan....meaning every payment you made towards the loan actually made the loan balance higher.  And the reason why you got that loan was because the payment was so darn low. Interest Only loans, etc.  Most of these loans are not even around any more for a reason.

Today though, investors and borrowers are significantly more educated.  Don't get me wrong, banks aren't allowed to lend those types of loans either.  But we made them work because the loans had such low payments and your got immediate equity.  I'm sure a lot of investors could tell story after story on this.  But to directly answer your question of "how did they work"....they only worked for a short time.  Then it all crashed.

Russell Gronsky · Answer

@Rijm D., you are being a "Monday morning quarterback" right now. Pizza delivery boys and bar tenders had houses they had no business owning but so what? No one could articulate how that was compounding to eventually cause a housing crash and furthermore, even if you could articulate it in theory, you couldn't prove it. It was a small group of people who dug into the numbers that figured it out. The Big Short does a good job of summarizing it.

To your question about how were loans structured: you could do 4.5% @ 80%LTV on a 30-year note and a 2nd position HELOC for 10% of the remaining value at 10% interest with a 10 year draw and 20 year repay. This is the loan I ultimately refi into in 2006. This is a pretty boring, vanilla loan, like you can find today.

But here is where it gets interesting and how your pizza boy, bartender and stripper owned 4, 5, 10 homes:

No-doc or low-doc Interest-only loans, where all you needed to show was a current w-2 (or just tell them you worked and they wouldn't even ask to verify anything) and your principal never went down on the loan. These were popular because of the massive appreciation so you didn't care about principal pay down as appreciation would eclipse what you owed on the place.

No-doc or low-doc 3-year ARMs. In my opinion, these were even more dangerous than the interest only loans. You get an ultra low interest rate up front, like 2-3% for 3 years. Then, the ARM would pop and rapidly increase to something like 7% or more for the remainder of the loan and you couldn't refi because you didn't have enough equity in the property. Suddenly, that pizza boy can't cover the monthly note and rents didn't support his new monthly bill. Pizza boys all over the country start dumping properties back onto the banks as they can't pay for them and the effects ripple from there.

I'm over-simplifying obviously but that's generally how I remember the loans being structured and how it unraveled.

If the interest rates in the future go back to the high rates we had prior to the housing crash then I'm assuming the values of property would fall since you need more cash to afford the same amount of house. Could we still make deals happen, probably. But it will definitely separate the pros from the passive investors who aren't 100% dedicated to making it work.

I don't think the system is set up for investors to always make it work. But housing is very important to the economy and the government so if it grinds to a halt I assume the government would do something to make it start moving again for....there are too many taxes to collect for them off RE transactions so its in their interests to keeping housing exchanging hands.

Sam Shueh · Answer

30% + down or more 1 loan or two mortgages with one lower than other. There were assumable mortgages at lower than market rate before(19.5%, then 12% for second).  Anyway, you look at it 6.5% was decent. At 13-16% there were only owner occupant. Too costly to invest.

The stock crash experienced last few days were attributed by having a free ride too long. People freaked out when they were told the interest rate was going up months before. People want to hear 1% or free interest to stay calm.

Rijm D. · Answer

What about before 2000? I get that it was free roaming about 2 or 3 years before the crash in 2008. Just read that Trump started a mortgage company right around 2006, amazing that Mr. Knowitalldouch could not see it coming either. All that is still a mystery to me, cause I feel like if you had your finger on the pulse just partly even one should have seen it coming, considering I worked in timesharesales back then and even the dumbest people had houses, even pizza delivery boys with 20k incomes. Anyways, people invested for way longer before that and the interest only loans. How or what kind of loans came before that predatory lending period? If they go back to those kind of high interest loans, could we still make deals happen? Or at what point if ever, is there a chance that it will be difficult or impossible to make deals work? Or is the system set up for investors to always make it work to keep the market going?

30 vs 15Y Mortgage & How did they invest before these low rates?

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