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Home, borrowed home

Buying a house with no money down was always sort of crazy -- but the market is just now realizing it.

January 05, 2007

INVESTORS, BANKERS and economists -- not to mention 80 million U.S. homeowners -- are constantly sifting through data to figure out what's going on with the real estate market. New housing starts, raw material costs, time on the market, average rent/mortgage ratios, the Federal Reserve chairman's loose lips -- all of these are supposed to give us vague and partial hints about whether the market is heating up, cooling down or "just right."

Yet the answer may be staring us right in the face. If you can't get a house with no money down, the sky is obviously falling.

That may be how William Dallas, chief executive of Agoura Hills-based Ownit Mortgage Solutions Inc., must be feeling right now. Ownit, which specialized in 100% financing of home purchases, closed its doors last week, bowing to a growing number of mortgage defaults and a financial industry rapidly losing interest in bonds secured by pools of high-risk mortgages.

The downturn for independent "sub-prime" lenders like Ownit is causing pain nationwide. Connecticut-based Mortgage Lenders Network USA Inc. has announced that it is withdrawing from the sub-prime market and seeking an "alliance" with a Wall Street firm. Locally, Irvine-based Option One Mortgage and Orange-based Ameriquest Mortgage Co. are looking to be bought. The problem for all these firms is that their market -- people who want to own homes but have bad credit, little income, few savings or all of the above -- is understandably at a much higher risk of default than the mortgage market as a whole.

Real estate is a topic so fraught with schadenfreude, forlorn hopes and visions of catastrophe that it almost seems like bad form to remain calm in the face of such bad news. The sub-prime market's 45-fold growth, from $13 billion in 1995 to $594 billion in 2005, stands as a monument to the nation's home-buying mania. You'd need the proverbial heart of stone not to laugh at the suffering of the gamblers who bet that the real estate market could increase indefinitely.

But sub-prime lending isn't going away. A larger share of the action will go to bigger players that can afford to engage in risky loans. Meanwhile, folks who need to shop in the bad-credit emporium will still get service; it just won't be as fast and loose as it used to be.

There's a puritanical impulse to say, "If you can't afford a down payment, you shouldn't be buying a house." But it may be more appropriate to marvel at a nation in which you can buy a house the way you'd buy a used car, and to thank the market's powers of natural selection that this behavior is now being curtailed.

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