The Loan Program for the Next Housing Bubble

The new loan program is called the "Pay You" loan, or PU for short. The PU loan has no payment of any kind. The total amount of interest each month is added to the loan balance. Further, appreciation in excess of this monthly interest is sent to the borrower each month. Rather than pay for an updated appraisal each month to determine value, an automated reappraisal system which looks at the current pricing of comps can accurately determine the current market value. Since homes now pay cash to owners each month, home ownership would be very desirable, and home prices should rise steadily far in excess of the monthly interest cost. With automated appraisals, little additional servicing costs would be required. Also, lenders would find the monthly service fees an attractive feature, so they would readily peddle the PU loan to any borrower who wanted it, and since borrowers are actually being paid to own their home, everyone would want to enroll in the program.

These loan programs would be very attractive to investors because the interest income would be booked as profits, and since the balance is growing each month, the interest income gets compounded. The main problems investors in mortgage loans have is that borrowers often pay back these loans early, and the balanced decline over time. Therefore, they do not receive the rate of return reflective of the stated interest rate. With the PU loan, investors actually get a greater return due to the compounding effect. The early payback is not a problem because even if a borrower sells a home, they will quickly buy a new one to get back on the home appreciation gravy train. The PU loans may even allow for assumability and portability so the loan doesn't need to be closed out when a buyer wants to move up or sells. It is a panacea.

Now we just need home prices to always go up...Lawrence Roberts is the author of The Great Housing Bubble: Why Did House Prices Fall? Learn more and get FREE eBooks at: http://www.thegreathousingbubble.com/ Read the author's daily dispatches at The Irvine Housing Blog: http://www.irvinehousingblog.com/ Visit The Loan Program for the Next Housing Bubble.