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Wednesday, November 22, 2017

I used to be a financial adviser. I spoke with clients about asset allocation and different investment options. While most people followed a conservative approach, there were always a number of folks who wanted to be aggressive. I had many conversations about options, commodities, futures. Oftentimes I found myself guiding customers to be more conservative because I feared they were not adequately weighing the risk inherent in the investment options they were considering.

I used to be a bankruptcy attorney. I dealt with many people who placed their homes at risk based on various assumptions. They assumed home values would continue to rise, that their income would increase each year and that their investments could continue to see double-digit returns. They did cash out mortgages using the cash to invest in any number of aggressive investments or to finance expenses they couldn’t otherwise afford. They chose riskier adjustable rate loans (ARMs) rather than fixed-rate loans to get lower payments so they could use more of their income for investments. They chose interest-only loans in order to access more cash flow for investments, and high loan-to-value loans to retain more funds to invest in stocks and Florida condos.

Then the world changed. Home values dropped. Many people lost their high-paying jobs while the fortunate ones simply accepted pay cuts. The stock market dropped and people watched as their retirement funds dropped in value at the same time as they had to take withdrawals to make mortgage payments. The ARMs they took saw an increase in rate with a rise in payments they hadn’t expected and couldn’t afford. The real estate investments they made dropped in value, in many cases to the point of zero equity. Unfortunately, these strategies caused many people to lose their homes.

Since 2009 I have been a mortgage loan officer. Most of my customers request fixed-rate mortgages, concerned interest rates may move higher in the coming years. While there is certainly a place for some people for ARMs, interest-only and high ltv loans, there seems to be a push among financial advisers who suggest to their customers to use the equity in their home as an investment vehicle. People are taking cash-out mortgages in order to use the funds to invest, and they are looking for adjustable and even interest-only options in order to reduce monthly payments and increase cash flow in order to maximize investment potential. This is a message I am hearing more and more from financial advisers as they strategize with my mortgage customers, presenting the benefits of Alt Mortgages. Unfortunately, people forget the past. Once again, people think real estate can only increase, the stock market is headed higher and their income will continue to rise.

I’m not suggesting that we are headed for a repeat of 2007. I simply suggest people ask “what if.” In 1987 we had the October crash, 2000 saw the internet bubble burst, and 2007 the housing crisis and recession. What if fortune doesn’t continue as you expect? Should you be placing your home at risk? The financial adviser, attorney and loan officer in me suggest you give this decision serious thought.

By David Siegel

 David Siegel is a home-lending officer for Citibank working out of the Englewood and Clifton offices. Contact David to learn about the pricing and programs available for Citibank customers and to discuss financing options. He can be reached at [email protected] nmls # 277243