There has been a lot of talk about people losing their homes because of the subprime mortgage mess and the bursting of the housing bubble. I understand the problems and distress that this situation is causing some people, but in other cases I wonder whose fault it really is. Let me explain.
During the housing bubble easy credit meant that a lot of people could buy a house with literally no money down. If they did not get one mortgage for 100% of the appraised value of the house, they would tie two or more loans together to do the same thing. (Also, when it comes to appraisals, while calling an appraisal an "MAI" appraisal may officially mean it was done by a member of the Appraisal Institute, some say it just means "made as instructed".)
In other cases, people would maybe put 5% down or even less. Then, as house prices went up (or they could get a higher appraisal), they refinanced and they took out most or all of the additional "value" of their house. So, even if they still technically had a 95% loan, it was more than what they paid for the house just a short while before. They would use the money, as the old saying goes, for wine, women, and song – and the rest they would just waste. (I guess, in these PC times, I should have said "wine, women or men, and song".)
Then there were the people who worked the system to get a mortgage bigger than the value of the house from the very beginning. They would cut a deal with the seller to pay extra and get a credit (i.e., money back) at closing, allegedly for repairs or something like that, but really just money they could spend on anything they wanted.
In all of these situations, the buyers would find, if the housing market dropped just a little (or didn’t go up in the last example), that they had a mortgage that was more than the value of their house. That is what happened when the housing bubble burst (as bubbles all do, eventually). As long as nothing else happened, things might have just gone along. People could have continued to pay their mortgage. But if they had an adjustable rate mortgage that they were planning on refinancing before the rates went up or if they had a short-term mortgage that needed to be refinanced after a few years, they were in trouble. And it wasn’t just, or even, that rates were higher. It was that the house was worth less than the debt. A 100% mortgage is one thing. A 105% or 110% mortgage isn’t going to happen. And the bursting of the housing bubble has finally smartened at least a few lenders up to the fact that they really need to get at least some down payment from their borrowers.
Thus, the crisis. In many cases it involves people who borrowed the entire price of their house, or more, or refinanced to borrow the additional equity created by the housing bubble and are now having trouble either refinancing or paying the new higher monthly payment under the ARM (adjustable rate mortgage) that they agreed to.
While the media, and the politicians, talk about poor people losing their homes, let me suggest other, more accurate, ways to view at least some of these situations. Some of these people took a gamble. They decided to buy a house, or a bigger house than they could otherwise afford, on the idea that real estate prices would keep going up, i.e., that the bubble would never burst. Sometimes gambles work; sometimes they don’t. I am not sure it is government’s job to help a homeowner who took such a gamble – because if it does, then it wasn’t a gamble; it was a government subsidy to buy a house they couldn’t afford. It would be like government subsidies for trips to Las Vegas.
The lenders took a gamble, too. They gambled the same way as the buyer: that the bubble wouldn’t burst and that they would get paid off. Even if we are willing to help a homeowner in that situation, why should we help the lender? And that is who would really be getting helped with most of these proposed plans. The homeowner would be staying in a house with no or negative equity. They would be paying a mortgage in the hopes that someday the value of the house would rise above the amount of their mortgage. But it could be a while. If the value went down a lot, it might not happen in any reasonable time frame. So when it comes time to sell, they would get still nothing for the house. But the lender would have been helped. It would have all those additional years of mortgage payments. It would not have had to take a loss on yet another property at a time when it already had lots of losses. And it would have a chance of actually getting all of its money. A good deal for the lender; a questionable deal for the homeowner; a lousy deal for the taxpayer.
In any case, is it really accurate in many of these situations to say that people are losing "their" homes? If the mortgage is more than the value of the house, the house effectively belongs to the lender. The people are just paying for the privilege of living in it, but they don’t really "own" any of it. It sounds more like renting than buying to me. And if the mortgage is way below water, or if the house is in an area where the values are not going to go up very much, then they won’t have any equity, i.e., really "own" part of the house, for a long time. If the people keep paying, it would be great for the lender (see above), but it doesn’t sound like a good deal for the people. The people could easily be better off maybe renting for a while and then, when they can, buy something they can afford and actually own a part of.
Finally, it is estimated that in some areas upwards of a third, or maybe more, of the houses in trouble were bought by speculators. They would sign up to buy the house even before it was built, betting on prices going up so much that they could sell the house before they had to actually buy it themselves. I don’t think many people are interested in helping these "homeowners".
The problem with most of the proposals for government programs to help homeowners is that most of the help will wind up going to lenders, to buyers who gambled that the bubble would never burst, and to speculators out to make a quick buck. I am not sure why those of us who bought a house we could afford with a proper down payment, who kept our mortgage payments at a level we could manage, and weren’t out to make a quick profit on the hope that the bubble wouldn’t burst (or that we would be smart enough to get out before it did) should be subsidizing those people and lenders and speculators who helped make the housing crisis the problem it is.
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