2nd Thoughts on 2nd Homes

Time was, about 90% of home purchases were made by people who planned to use the property as their primary residence. Not any more, according to the National Association of Realtors. Last year, investment properties and vacation homes accounted for more than a third of residential real estate sales. To be more specific, investment property accounted for 23% - nearly a quarter - of home sales, with vacation homes accounting for 13%.

So what's that got to do with loan servicing? Probably not much, but maybe a lot.

Every economist we've talked to recently sees little evidence of a national "bubble" in home prices. But they are starting to see warning signs. Heavy investment purchases of residential real estate, which often indicate that people are buying homes purely on the expectation that prices will keep rising rapidly, are one potential sign of a bubble. That, combined with the rapid price appreciation seen in recent years in some markets, could leave prices vulnerable to a downturn if interest rates rise more rapidly than expected. And when home prices fall, some borrowers will find themselves under water and unable, or unwilling, to continue paying their monthly mortgage.

There are other considerations that come into play when assessing the new housing market as well. With baby boomers approaching their 60s, more and more will be inclined to purchase second homes, either as vacation properties or as investment properties. Servicing those loans shouldn't be much different than servicing loans on borrower occupied properties, but lenders need to make sure that underwriting of second homes takes into account the nature of the market.

For Realtors and for mortgage lenders, the second-home market has shaped up to be a substantial growth opportunity. Managed well, we're confident that lenders can serve this market profitably without substantially increasing their risk profile. The key is to make sure that the business is well managed and all the risks are taken into account.

Otherwise, second homes could be the next real estate crisis waiting to happen. Troubled borrowers will let go of their second home before they let go of their first.

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