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February 25, 2009
A Modest Mortgage Proposal
The more I read about stories like the one below, where the guy in the cave house has to sell, the more annoyed I get. Look, as Ed at HotAir pointed out the other day, you do not get foreclosed because your home has "lost" appraised value. You get foreclosed because you are not making the payments. This can not be repeated enough. Certainly there are people who have lost their jobs, and if the Government feels it 'must' help some folks then these are the ones that it should consider. But they are the only ones. The VAST majority of people who are being foreclosed (ok, I am making a complete guess on this, but based on anecdotal evidence, i.e. every story I see in the MSM that's the conclusion I've reached, and since it's my blog I feel free to make shit up if it advances my point, and that includes crafting sweeping generalizations) are being foreclosed because they took one of two gambles when getting their mortgage. The traditional mortgage is at a fixed rate for 30 years. You know exactly the amount you're going to pay every month; it doesn't change. People with these mortgages aren't defaulting. They budgeted based on their incomes and they're making their payments.
The folks who are in trouble, on the other hand, got themselves into a mess in a couple of ways, all of which involved poor investment decisions that in no way shape or form should we be required to bail them out of. Look, this is not hindsight talking; these were risky, hell, crappy, ideas back when the folks did them. We bought our house in 1999 and prices were literally rising daily on the houses that we looked at; we looked at these alternative mortgages and thought "why the hell would we want to do that? We want to know exactly what our payment will be every month." One of these bad ideas is that, caught up in the speculative housing bubble, they saw houses not as a long-term place to live that also happened to be a decent investment but rather as a chance to make a lot of short-term profits. So they bought a house using one of these stupid-ass "balloon" mortgages, where the payments are relatively low for 5 or 6 years and then you have to pay the entire balance off. This works great if the market stays hot and you can sell the house, but you are totally dead if the housing market even stagnates, let alone drops. As the market has indeed dropped the flippers are screwed.
Another group who has been killed by the downturn in house values are the ATM-ers, the people who used their houses as ATMs to finance lifestyles way beyond their means. People who had owned their houses for a while, had reasonable payments and perhaps even had paid off their mortgages got seduced by the easy money to draw out hundreds of thousands of dollars in the "equity" that their houses had built up by taking out home equity loans or re-mortgaging the house based on the new inflated appraisals. And they spent that cash on cars, cruises, furniture, electronics, fancy meals; all sorts of toys and that spending in large part drove our economy's bubble for the last decade. These folks needed the housing market to keep rising so they could keep re-financing basis the higher home equity to support their living beyond their means. They are like speculators in stock or commodity markets; they guessed wrong and now the margin payments are due. Go watch "Trading Places" again for the Duke's margin call.
There is no reason to bail any of these folks out; that would only encourage more of this behavior. I mean, hell, if we bail these people out we might as well bail out the stupid, poorly-run banks who abandoned any sense of fiscal prudence in loaning them the money too, right? Oh poop....
There's also another group of folks who are in a bind here, and that's the people who took out Adjustable Rate mortgages. Again, these people were gambling. They thought that interest rates would go down (even though they have been near historic lows for the past decade) and thus their monthly payments would go down as well when the rates adjusted. Many of them were wrong. Again, why should we bail them out? When we bought our house in 1999 we budgeted based on the fixed rate at the time and got the fixed mortgage accordingly; it was around 7.25% I believe. In fact rates did go down and I was able to re-finance at 5.125% about 4 years later which was a bonus for us. I certainly didn't take on a higher initial payment than I could afford on the gambler's hope that rates would go my way, which is in effect what these people did. Again, why should I be forced to cover someone else's gambling debts?
So here's my proposal. We need to get away from thinking of houses as liquid, short-term assets and eliminate flipping so that people will budget and only buy houses that are within their means to afford for the long-haul. Certainly from the banking side they need to use due diligence and not make loans to people who can not be reasonably expected to pay them back; home ownership is not a "right" but an economic privilege that one earns through work and proven credit reliability, so all the Fannie Mae/Freddie Mac inducements that have caused many of these problems need to go. But also I think that balloon loans and ARMs need to be eliminated to cut down on the gambling, speculation and unpleasant surprises; the only mortgages that can be done should be fixed-rate.
Posted by Mr. Bingley at February 25, 2009 09:27 AM
Comments
"There's also another group of folks who are in a bind here, and that's the people who took out Adjustable Rate mortgages."
Not all of them. Sometimes, that's the only mortgages being offered. When we built our modest house in 1994-1995, only three institutions were offering construction loans in our area and they were ALL ARM's. The economy was better then and we were fortunately able to re-finance out of that before the five years were up. We were vulnerable to a recession had one hit us at a bad time but I don't think we were in any way irresponsible. The problem today is that not only are a lot of people vulnerable, there is no relief (Re-financing) on the horizon. Either their equity is in the toilet or there's no loans to be found. I don't advocate bailing them out, though. Bad things happen to good people, too. Learn from it and move on.
Posted by: Rob at February 25, 2009 09:44 AM
Point noted, thanks Rob.
Posted by: Mr. Bingley at February 25, 2009 09:50 AM
Yay, Trading Places reference!
I bought "less" house than I technically could have afforded, but knowing that I wasn't going into huge debt made me happy. I think I made a wise choice now.
I've also had people express surprise that I've not tapped the equity in my house. Again, I'm glad I made the choice not to.
I admit a wee bit of guilty schadenfreude about the people who lived lavishly and are having to eat it now, while I drove my boring old car and wore the same old boring clothes and did boring cooking at home, and pumped the money into savings instead...
Posted by: ricki at February 25, 2009 10:47 AM
What say we clone Ricki and Rob and make them part of a mandatory program on just basic personal finance that every high school kid must get before they graduate? You know, what is an ARM, or what kind of loan terms you will get with a credit score of 675 vs 775,that kind of thing.
Of course, if schools don't even care if you can find the bleeping country on a world map.......back to my meds, sorrry.
Posted by: Yojimbo at February 25, 2009 12:36 PM
Yeah, ricki, ain't being boring really boring? ;-p
Mr. B., Rob, the overall point here is making a responsible financial decision, where "responsible" means "I am not living outside my income, either in terms of acceptable risk or ability to pay".
Your case is a great example of responsibility, Rob. You had a plan, based the reality that you could get only ARMs. You considered and accepted the risks, but only long to dump the ARM. It's a gamble, but a considered gamble. There's a difference.
Me, I kept on getting all these re-finance offers from my mortgage lender, for ARMs, slightly lower fixed interest, etc. I have a 30 year fixed rate loan; I kept on blowing them off, but it took a couple of years before they stopped calling me. I was so tempted to write a letter to the effect of, "What, do you think I'm stupid or crazy? I'm ahead on my loan, thanks to extra payments, why would I want to refinance it, just for an extra $100 a month? Give me a break!"
Posted by: JeffS at February 25, 2009 01:15 PM
I bought my house in 1990 on a contract for deed with a five year balloon. That was before housing prices really went crazy. I only had about five grand for a downpayment and my income was not yet good enough to finance the other 90% plus. My monthly payment would be only a little more than what I was then paying in rent. It was a little bit of a risk, but it was a reasonable one at the time I think. Five years later I had a much better income level, a perfect track record of payments, and increased equity in the home, and I got a traditional fixed rate mortgage to cover the balloon. Was it a risk? Yes, but reasonable. Would I do something like that now, or even a few years ago? No way. Like I said, that was before home values got ridiculous.
Posted by: Dave E. at February 25, 2009 03:46 PM
And speaking of Ricki, Bravissima!
Posted by: Ken S, Fifth String on the Banjo of Life at February 25, 2009 04:08 PM
When I bought my place I used almost all the cash I had for the down payment and to pay closing costs. Because being cash poor made me nervous I placed an equity loan with the same lender financing the 30 year fixed mortgage. I've never drawn on the lime, it was only to give me some peace of mind in the event of an emergency. I paid extra principal every month because this is not a speculative investment, it's my home.
I'm not happy at the thought of helping bailout irresponsible borrowers, and as long as the federal government is interfering in the housing market I don't see how the market can settle out. Markets don't like uncertainty and uncertainty, or atleast lack of detail, is what the government seems to be pedaling.
Posted by: Retread at February 25, 2009 05:05 PM