'Wow! 1.2%... The sky is falling. The stock market goes up and down more than that in a day.'
"True, but most investors in the stock market aren't leveraged 10:1 or 20:1 like in real estate."
Roughly 25% of resident-owned homes have no mortgage, so their owners can ignore this mess as long as they are pleased with the "housing services" they are consuming. Such people do not tend to see their houses as "investements" but as durable consumption items.
Borrowers with 30% to 99% equity, will only risk their paper equity shrinking, as long as they can keep up their payments, and they are maybe 40% to 50% of the owner-occupants.
The rest, with less equity or none, and the investors in their loans, stand to lose a lot when local markets trend downwards, or even stop appreciating, especially markets in which 20% to 30% or more of recent transactions are "flippers", hot money hoping to turn a quick profit while never occupying the property. They could easily see 20% to 30% declines that wipe out their equity and leave them with loan balances far more than they can sell the property for. Depending on the state, either they, or their lenders, or both, are in deep doo-doo. Note that, until recently, national average home prices had not sustained a negative growth rate since the 1930's depression, yet a number of regional busts sent home prices down 25-40 percent. "Housing markets are local" (though financing of housing has become national and global thanks to the secondary market for mortgage loans that has grown very large in recent years).
In the past five years, a fairly large percent of new mortgage loans have been 10%, 5%, or even less down (the 0% down, or nothing down, with 15% or 25% cash on top were popular for a while, but not so common now). In the last couple of years "nothing down" deals have become very common, effectively "infinite" leverage.
Whether covered by mortgage insurance, or set up with an 80% LTV first lien and a 10% or 15% second lien, and perhaps with a HELOC at or soon after closing that eliminates the borrower equity altogether, these deals are losses waiting to happen if the borrower's employment or other income sources are disrupted. Unlike stock exchanges where "He who takes what isn't his'n, gives it back or goes to prison", residential borrowers in many states can walk, leaving the investors in their loans holding the bag, with no penalty other than a (temporarily) trashed credit rating which will recover in three or four years (credit scores focus on events of the past few years, and old indiscretions rapidly fade in influence as they age). In many cases, their credit rating was already trashed when they got their loan (so they have little to lose by defaulting), because secondary market aggregators have found plenty of naive capital, 'yield hogs', willing to buy the toxic waste (speculative grade mortgage bonds) that must be sold in order to make most of the bonds backed by mortgage pools with heavy doses of such crappy loans palatable to "investment grade" lenders.
Over the next few years, these "yield hog" will be retching up their gains, and lose quite a few pounds in the process.
Even worse are the super low payment ARMS with negative amortization that lenders get to put on their books like regular loans. Nothing like seeing the last three years profit go up in smoke overnight because it was a figment of your imagination anyway.
With a single law change mandating that holders of notes notify home-owners that their own home's mortgage is being sold at a discount, and a provision that the home-owner has the right to strip that note from a Pooled package and buy it, an entirely new buyer can be introduced into the Market.
All of a sudden you are paying your (now discounted 15%) home mortgage payment to your own 401k because your 401k just bought your note when your lender tried to sell it at a discount.
The old days are gone. The excuse that "it's too complicated" to allow a home-owner to buy his own note out of a package of pooled notes is moot in the age of the computer.
What home-owner would turn down the chance to get 15% (some notes are being discounted even more) off of their mortgage principle?!
Yet most home-owners today don't even know that their lender is trying to sell their mortgage, much less at a 10 to 15% discount.
So you shift your 401k from stocks into real-estate (or you get your parents to help out or otherwise raise the money to buy your mortgage note)...your real-estate. Big deal. Your note was being sold at a discount, why shouldn't you benefit instead of some financial institution?!