Now that the rest of the mortgage market is cooling, a New York Times recent article, "The $3.6 Million Mortgage", says that mortgage companies are increasing the number and the amount of big loans to Manhattan high flyers. Instead of paying what used to be 50% down on their $4 million dollar apartment, buyers can put 10-20% down, and invest the rest in Conneticut real estate or the stock market, where they think they can get 20-25% returns. The mortgage companies are making it much easier to speculate on Manhattan apartments. Thus inflating NYC prices, as well as inflating property and stock that the buyers are buying elsewhere, making the Manhattan real estate market the base of a huge pyramid scheme. If the Manhattan real estate market crashes, which has been known to happen, what will happen to everything that it is propping up?
How did all of this come about? In part, because the rules are changing for the big mortages, from the article:
Depending on a borrower’s net worth and financial background, Mr. Appel said, lenders are often willing to finance 10 to 20 percent more than their guidelines dictate, provided that the mortgage is less than 80 percent of the house’s value. This has resulted in a vast increase in the amount of allowable debt. "All of these banks are willing to evaluate exceptions on a case-by-case basis," he said.
I find all of this deeply concerning. Others have also raised a concern, and on the second page of the article, author Christine Haughney says:
But giving the superrich increased access to borrowed money has raised eyebrows across the rest of the lending market. Mr. Manning of the Rochester Institute of Technology points out that it has become far easier in the wake of the subprime crisis for a wealthy Wall Street executive to get a loan than for anyone else in the home-buying market.
"There’s no problem with rich people getting loans as long as other people aren’t disadvantaged in the process," he said. "Are we entering a new Gilded Age where there’s just a new set of rules for the rich?"
I also have to wonder if the banks are going to high flyers, not because they are the safest and best bet, but because they are the ones that can work the system when things go bad. They are the ones that can get the institutional or government bailout for their industry when things get ugly. I suspect the mortgages are a result of agressive 30 something bankers giving aggressive 30 something traders a good deal. Also from the article:
But David Strause, a mortgage banker in the Manhattan branch of Countrywide Home Loans, a division of the mortgage company, said that the wealthy buyers he had seen in the last four months had no qualms about taking out large mortgages. He said that such borrowers were typically male, aged 30 to 45, working in finance or real estate and making around $1 million a year. He has found that buyers in their early 30s borrow most aggressively.
This article paints something wrong about our mortgage markets on many levels.