The debate goes on as to whether the housing market is due for a massive collapse. For every analyst predicting a bursting bubble are those with diffferent views, such as Scott Simon, mortgage group head of Newport Beach-based Pimco, who visualizes that the market will “slow under its own weight,” but that the strong job market will insure a soft landing as “bubbles only burst when there is a lot of unemployment.” Similar sentiments are echoed by Mike Englund, chief economist of the global bond and currency consulting firm Action Economics, who contends that the recent rapid price gains in the housing market “doesn’t mean it’s a bubble.”

Though we cannot ignore the economists’ broad expertise, I invite you to view matters from my perspective, to see where the bodies are buried. Consider this recent transaction. A 3-bedroom house, acquired October 2005 by an investor for $420,000, was sold April 2006 for $490,000. Terms of sale: no cash down; $392,000 adjustable rate first mortgage, initially at 7%; $98,000 fixed rate second mortgage at 10%; $10,000 seller creditback to buyer at close of escrow. New owner’s monthly payments: first mortgage $1,306.67 for one year (remaining $980.00 added to principal as negative amortization), plus second mortgage, taxes, and homeowner’s association fee, all totaling $2,803. After one year, payments increase to include full amortization at then-market interest.

Note the buyer’s position in a year if market interest is 8% (today’s prime rate). Total monthly payments will increase by 61% to approximately $4,510. Will the homeowner will be ready to assume this burden? If not, what will happen? These are not hypothetical questions, for what I’ve just related is an unhappily common method of home acquisition in many parts of this country. Even a modest slowdown in the economy will translate into hundreds of thousands of foreclosures just waiting for a time and place to happen.

A concluding thought:
Who is the loser? Not the investor, the real estate agent, nor the loan broker. Neither is the homebuyer, who is in for free with modest payments for a year. The real losers are participants in funds—mutual, hedge, and pension—which purchase these loans from investment banks in packages. These unsuspecting lenders-of-last-resort provide the funding for these inherently unsound mortgage loans. It’s likely that when Joe Doaks discovers in 2010 that his 401(k) is half its 2009-value, he’ll never know why.