Editor’s note: Steven Krystofiak offers an insider’s take on what’s been unfolding in the subprime mortgage industry. But he is no industry apologist. Stay tuned for a series of articles from Krystofiak on Inman News in coming weeks.

Every year there is a natural progression of future first-time home buyers, usually consisting of people in their late 20s to mid-30s. These people have obtained financial stability with savings and steady employment, which is a healthy precursor to buying a first home.

In recent years far too many people took popular shortcuts to obtain their homes. These shortcuts are in stark contrast to healthy real estate practices that have a long, traditional, proven track record.

In many cases, these new highly popular loan products were the only way for first-time home buyers to obtain a home. These shortcuts were misnamed “affordability products” and would have been better described as “obtain-ability products.” Long-term affordability, which should be a goal for both consumer and lender, is not associated with these toxic shortcuts.

The home-obtainer-ship shortcuts included “stated-income loans” (which encouraged consumers to lie about their income on mortgage applications), zero down payments, negatively amortized loans, interest-only loans, and short-term suicide loans where the fixed loan period is only two or three years commonly tacked on with an equally long prepayment penalty. Many times the menu of these options would be coupled together.

People who took shortcuts should have waited, and were only able to obtain a home because of the risky loans that will be the culprit of their foreclosures in the coming months and years to follow. Many people facing foreclosure should have waited one, two or even three years before starting the home-buying process.

Communities, the media and industry insiders built up the courage to the would-be home buyers with such rhetoric as, “If you don’t buy now you will be priced out forever,” and “Real estate prices only go up,” and “You can’t afford not to buy a home,” and “If you buy one property you can make $50K a year, so why not buy two, three or four more properties and make even more?”

Lastly, I end with my favorite quote that came from a winner in a real estate game show: “This (market) is not a bubble; bubbles are for bathtubs.”

The hype and hysteria we have seen for the past few years gave comfort to people wanting to take out these loans. But with foreclosures sure to happen in droves just around the corner, these people otherwise would have been the ones helping us get out of the future impending home debacle we will continue to experience in 2008, 2009 and 2010.

With these recently foreclosed people now out of the real estate market in 2009, where will that natural progression of home buyers come from? With foreclosure or bankruptcy on their records there will be a lack of qualified candidates to become first-time home buyers in the future. This will cause the future recovery to take longer than in previous real estate corrective cycles.

First-time home buyers are the key to a good real estate market. An old rule of thumb is that with every first-time home buyer entering the market there is a filtering up, which creates three more transactions. A large reason the real estate cycle of the last five years has been so successful is because banks have been able to provide toxic mortgages to first-time home buyers. This has kept the succession of real estate sales going and going like the Energizer bunny.

But as many of you are now thinking, “I haven’t seen that bunny on TV for years.” There lies the problem — this market can’t keep going.

The market needs more first-time home buyers for it to be successful. Without them, in coming years the real estate market will go the way of the Energizer bunny. In the future, you will think back just like with that commercial and say to yourself, “Oh yeah, I haven’t seen home-price appreciation in years.”

Steven Krystofiak is a mortgage broker based in California. He is president of the Mortgage Broker Association for Responsible Lending, an advocacy group.

(Read Krystofiak’s previous articles, “What is a subprime loan? It depends on whom you ask,” and “High-risk loans enable buyers to obtain, not afford homes.”)

Show Comments Hide Comments


Sign up for Inman’s Morning Headlines
What you need to know to start your day with all the latest industry developments
Thank you for subscribing to Morning Headlines.
Back to top
Real estate news and analysis that gives you the inside track. Subscribe to Inman Select for 50% off.SUBSCRIBE NOW×
Log in
If you created your account with Google or Facebook
Don't have an account?
Forgot your password?
No Problem

Simply enter the email address you used to create your account and click "Reset Password". You will receive additional instructions via email.

Forgot your username? If so please contact customer support at (510) 658-9252

Password Reset Confirmation

Password Reset Instructions have been sent to

Subscribe to The Weekender
Get the week's leading headlines delivered straight to your inbox.
Top headlines from around the real estate industry. Breaking news as it happens.
15 stories covering tech, special reports, video and opinion.
Unique features from hacker profiles to portal watch and video interviews.
Unique features from hacker profiles to portal watch and video interviews.
It looks like you’re already a Select Member!
To subscribe to exclusive newsletters, visit your email preferences in the account settings.
Up-to-the-minute news and interviews in your inbox, ticket discounts for Inman events and more
1-Step CheckoutPay with a credit card
By continuing, you agree to Inman’s Terms of Use and Privacy Policy.

You will be charged . Your subscription will automatically renew for on . For more details on our payment terms and how to cancel, click here.

Interested in a group subscription?
Finish setting up your subscription