constructing the underdog, part vii: mortgages
why should the government help people who can't afford the houses they bought?
by jeffrey d. walker
This article is part of a series intended to foster open discussions on the issues as we get set to elect the next President of the United States. See more info about the concept here. You're invited to add your two cents by joining the discussion.
Recently, it's been hard to avoid stories about the "mortgage crisis" in America. Many of your favorite and not-so-favorite news organizations probably just ran a story about it. Congress is hammering out measures intended to protect mortgagees and prevent any further declines in the housing market. Even the president supports reform to our nation's mortgage plans.
It should come as no surprise that both major presidential candidates also favor government intervention to fix the mortgage problem. Though John McCain was reportedly mum on the subject until just recently, he now backs some bailout of the 'giant' mortgage corporations. Barack Obama dedicated a section of his campaign website to mortgage reform some time ago, stating his intent to "Protect Homeownership and Crack Down on Mortgage Fraud." I say that it should not be surprising that these two candidates would support saving people's homes, because if one of them didn't, the opposing ad would be something like, "Mcbama supports throwing down on their luck Americans out on the streets!", or something awful like that. What else could they do?
But why should the federal government help people keep a house they can't afford?
Don't think I'm ill-informed. I know the American mortgage market doesn't stop at the individuals facing mortgage foreclosure. As your favorite and your not-so-favorite news organizations probably told you, if the organizations that fund our nation's mortgages collapse, so it is said that banking and financial institutions the world over will fall as they are all heavily invested in each other. And so, a government rescue is needed to save not only the viability of our own economy, but the economy of the world. And who am I to say this is false? I am no Alan Greenspan or Ben Bernanke. Maybe a collapse of the mortgage market would wreck the economy.
But whether or not the world economy is impacted, it will be the taxpayers of America who will be paying for any mortgage bailout. And that means that you, my fellow taxpayer, are helping pay for people to live in homes they couldn't otherwise pay for. Does that seem right?
Let me say that I've had an experience with a "predatory lender." I was thinking of refinancing our mortgage last year to avoid paying PMI. I called a recommended broker, told him what I had (a 30 year fixed rate, w/ monthly PMI), and I told him what I wanted (a 30 year fixed rate with no PMI). I assumed that our interest rate would increase since interest rates were up since our first mortgage, and I told the broker. But I also told him that I hoped that the increase interest would be offset by the avoidance of PMI. Their firm offered a "no PMI" mortgage, and I was clear on the phone this is what I wanted. I also sent an authorization to check my financial history, and on the cover letter reiterated that I was seeking a no PMI mortgage. A few days passed, a few pleasant phone calls were exchanged, and things seems to be moving along and "looking good" they said.
Then, one day I was called and asked if I had a fax. I said I did, and was thereafter forwarded a form. I've since disposed of the same, but being the attorney that I am, I read it carefully at the time. The form basically indicated that I accepted their loan terms as offered. Only, at that time, no one had told me what the terms were. But what's more, the form they asked me to sign stated that I would be bound to pay all of their fees whether I went through with the loan or not.
I called back to the broker and discussed the form. He assured me that it was no big deal, that things were fine and that I should just sign it and send it back. After refusing to sign until I was told (at minimum) what my interest rate was going to be, I was transferred to a supervisor.
What happened next was the most wretched phone call I can remember experiencing. In fairness, much of what the supervisor told me was true. He indicated that interest rates were increasing soon (they were, but I already knew this, having made my application at the time I did trying to get in front of the next Fed. Chairman's report). He indicated that if they went up before I signed the form, I would be stuck with the higher rate (also true). And though both he and the original broker told me essentially that everything was going to work out, he could not tell me the specifics as to what I would actually be getting. I told him that, in that case, I couldn't sign their form.
Let me assure you that the intensity with which this man insisted that I sign that form was coercive enough that I'm sure that there were people convinced by that man that it was in their best interest to sign that form, regardless of the facts. I have no proof, but feel strongly that at least one person being foreclosed on fell victim to that guy, or one just like him. But besides being an attorney, I possess a fairly keen sense of B.S., and this guy reeked of it. I told him I wasn't signing until I was comfortable with the deal and had all the terms.
A few days later I got the numbers. The bottom line was a little less than what I was then paying. Only, the first thing I noted was that PMI was still required. Hmmm. The second thing I noticed was that my interest rate, as expected, was higher.
The B.S. alarm was going off again.
It took a couple hours of comparing a current mortgage statement to the quote to figure out what was up. The forms were entirely dissimilar, and I had to cross reference and recalculate certain figures to make apples into apples. I kept looking from the quote to the mortgage statement: every figure was higher in the quote, but the bottom line payment was lower. "WTF?" I thought. It was not until I reversed my pattern, and looked from my statement first and then at the quote, that I saw what they did there. The new company had made no payment toward my property taxes. These figures are not insignficant in New York State, and when I added this figure in, I realized that the broker was offering me a quote that would have me paying about $250 more a month than I was paying. Not only that, but since we were about two and a half years into our existing-at-the-time 30 year mortgage (having roughly 27 1/2 years of payments remaining), the refinance was asking me for a new 30 year mortgage, and so the broker was asking me to pay $250 more a month for over two years longer.
When I called to ask why the taxes weren't accounted for, they said something like, "oh, that doesn't have to be paid by us." This not being an acceptable answer, I shortly thereafter sent a written fax canceling the deal.
I got a phone call later from a woman who was curious about my apparent "confusion." I won't tell you what I told her.
I offer this story to explain that I fully understand that there are predatory lenders, and how someone could get suckered. Like Bill Clinton, I feel their pain. And I'm no heartless bastard. I don't want a mistake to force someone to become homeless.
But riddle me this: Should American taxpayers be forced to bailout the financial pitfalls and blunders of its citizenry? Think of this another way: If gas prices skyrocket out of control, should the government start paying for peoples' SUVs they can no longer afford, but still let them keep driving them all the same?
If bailouts are the answer, and the government has to keep increasing taxes to pay for these subsidies, what will happen when the taxpayers have nothing left to give? And more importantly, at what point of the government subsidizing all that we own do we begin calling ourselves communists?
What do you think?
A practicing attorney and semi-professional musician, Walker writes for his own amusement, for the sake of opinion, to garner a couple of laughs, and to perhaps provoke a question or two, but otherwise, he doesn't think it'll amount to much.
ABOUT JEFFREY D. WALKER
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7.25.08 @ 10:20a
Bailouts at anything short of the bank level are a get out of jail free card to people without financial responsibility. If you're going to ensnare yourself in homeownership, it's YOUR responsibility -- and not the federal government's -- to understand the terms to which you're beholden.
As with many other financial systems (campaign finance, the tax code), mortgage lending is a system that screams for revision to a point of clarity. Homebuyers should not require a real estate (or other) attorney to decipher the complexities of their mortgage. Truth in lending statements need to go further.
Because banks ARE federally insured, the federal government has the right to demand their compliance; essentially, "If we're going to back you up, you need to play by the rules." Those rules need to include standardization of lending fees, and tight regulation of ARMs. (Personally, I would call for elimination of ARMs as nothing but a bait-and-switch loan that invariably hurts the consumer.)
7.25.08 @ 11:52a
"Should American taxpayers be forced to bailout the financial pitfalls and blunders of its citizenry?"
Jeff, in this case, the simple, clear, obvious, level-headed, self serving, practical and sane answer to your question for all home owners, and, indeed, all Americans, is YES! One foreclosed house in a neighborhood, on average, lowers the collective home values in the ENTIRE neighborhood by 1%. Unlike the auto market (your SUV reference) we, as homeowners, are at the whims of our local housing markets. This is not an issue of tax payers bailing out irresponsible borrowers, this is about saving our own asses from a mess that threatens to drag us all down into penury. I, for one, would rather dole out a couple hundred bucks in extra taxes to stop this mess from getting any worse, than see the value of my own primary investment, my house, plunge by 5, 10 or 20 percent, just to maintain some meaningless, high handed principle about personal responsibility, which, given the reprehensible lending practices you cite, is dubious at best. So what if some assholes get a free ride out of this? WE, you and I, and all the other responsible homeowners of America, will PAY much more dearly for this mess if we chose to do nothing about it!
7.25.08 @ 2:33p
I'm inclined to agree with Rob. One of my neighbors in a 10 unit condo building just walked away from their mortgage without even talking to their mortgage holder. Now, there's a huge lender's AUCTION sign on the door of the garage. I could almost here the value of my condo dropping as I drove into my garage. The sale price at auction will certainly affect the value for all of us. Fortunately, another neighbor who was going to walk away, worked with a broker who found him an acceptable rental deal. The rental will cover his mortgage plus the homeowners association fee. If he had walked away, as threatened, we'd be even deeper in the tank. I'm one of the fortunate ones in the complex; I bought at a low point in the housing market. Some of my neighbors, who bought later, are probably upside down now.
7.25.08 @ 2:49p
Listen: I don't disagree that a property foreclosed on in a neighborhood affects other homeowners. Even still, a bailout would, in my estimation, leave the properties in an inflated state (i.e., the house would remain priced at a value where the purchasers shouldn't have been able to afford them, though they are not being kicked out). As such, these would-be deadbeats are still living in a more expensive place than they should have had on paper. This is a false fix that, in turn, restricts new buyers from even getting into the housing market, and rewards dummies who got in wrongfully.
On the contrary, though foreclosures might cause a drop in local property value in the short term, I assert that this would then permit new buyers to get back in the market after the correction. Then home prices will begin to rise again once the mistakes of the pasts are erased, and the foreclosed on homes become occupied. Current homeowners without mortgage trouble might see a small loss short term, but it would not last over time.
However, this bailout you seem to be embracing, is best served only to save your OWN property value short term, even though it rewards idiots who probably shouldn't be there, and simultaneously, punishes and prevent others from getting into the falsely inflated price of your neighborhood. That still just doesn't sit well with me.
7.25.08 @ 3:05p
Precisely. It isn't the fault of the property, or the neighborhood; it's the fault of those who drove the price for that property or neighborhood up through unrealistic/inflated prices.
Who would you rather have as your neighbor: a landlord who (in all likelihood) isn't even living on the property, abetting municipalities that would love to see property taxes rise with an artificial valuation...
...or an individual mortgage holder who has a personal investment in the property, because it's his/her residence?
If you're a speculative investor, then yeah, it's a bitch. (See also: petroleum) But I'd rather put the screws to them for manipulating the market than have some honest-job family blocked out of their American Dream.
7.25.08 @ 3:27p
As a city dweller and renter, I'm less familiar with the world of home ownership and its accompanying challenges and rewards. But I will say conversations the likes of which you describe here with the broker are hazardous to one's faith in humanity, however passingly. Hopefully we can all agree that entities like that (or all brokers period?) are not helping the housing market, in whatever shape it's in. Is this new? I doubt it. But still, if we're talking about responsible home owners, may as well ask, what about responsible lenders? The question seems naive, but what does that say...
7.25.08 @ 4:06p
I think it's that experience with the lender described herein (along with similar stories heard through various news organizations) that prevents me from completely disagreeing with government intervention in this matter.
The flip side of that coin is, I knew better than to sign what I didn't understand. I don't know if other people are duped, or if they were just "wishfully thinking" that they'll be okay: As P. T. Barnum said, there's a sucker born every minute. No bailout or legislation is going to fix that. And my fear is, this "bailout" really is more about keeping banks afloat in the meantime, and will do little to actually address or correct responsibility in lending or borrowing, because at the end of the day, mortgage brokers will still want commissions, and people will still covet houses out of their price range. Therefore, I think placing the blame squarely on lenders OR borrows is a mistake - it takes two to tango. And, this bailout, I don't see as a true solution to these two conflicting motivations. It's just a quick and expensive fix to maintain the status quo, and I don't see that as a real solution.
7.26.08 @ 8:20p
Jeff, the problem here is much bigger than you seem to suggest, which is really the whole point. We're not talking about a hiccup... We're talking about 20%... 30%... 40% of your home value dropping out right from under you just because your neighbors were idiots. We’re talking about our whole economy being sucked into a vortex of deflation as the dollar sinks like a lead fart. Those property values aren't going to come back over night, nor in a year, nor perhaps even in a decade. There isn’t going to be any happy rebound in the short term. There will be no on rush of new buyers entering the market, largely because everybody is spooked. And if nothing is done, property values will keep declining along with the dollar. We're talking about tens of thousands of dollars disappearing from the personal equity of perfectly responsible people just because of the mistakes made by others. I simply do not accept as "logic" the idea that a rightful punishment for the financial malfeasance of a certain fraction of this country’s population should be allowed to substantially reduce the value of my home, yours and everybody else's. Where is the justice in that? I’m sorry if this doesn’t “sit right” with you, but frankly, tough shit. This is well beyond the point where there is any relevance in assigning blame or apportioning punishment. We’re all on the Titanic right now and I’m much more interested in finding a lifeboat than wagging my finger at the captain for his bad steering…
7.26.08 @ 8:56p
Please substantiate those figures with some sort of factual support, otherwise they're nothing but histrionics.
From a story in today's St. Louis Post-Dispatch:
"That emptiness has an impact. A study by the Fannie Mae Foundation found that each foreclosure depresses the resale value of its neighbors by 1 percent. In January, the Center for Responsible Lending estimated this would affect nearly 600,000 St. Louis-area homes, costing them, on average, $1,582 apiece."
7.26.08 @ 10:50p
"...Foreclosures push all home values down by an estimated 6 percent, and will contribute to national prices declining another 15 percent by the end of 2009, Ethan Harris and Michelle Meyer, Lehman Brothers Holdings Inc. economists in New York, said in a report yesterday... In Riverside-San Bernardino, known as the Inland Empire, where the California Association of Realtors said home prices plummeted 35 percent in May compared with a year earlier, one in 32 households entered foreclosure, according to RealtyTrac. Bakersfield, Sacramento, Oakland, Fresno and San Diego were the other California metro areas in the top 11... The Las Vegas area, where home values fell 27 percent in May compared with a year earlier, according to the S&P/Case-Shiller Home Price Index, had the third-highest foreclosure rate, with one in every 35 households, RealtyTrac said..."
7.26.08 @ 10:55p
I further point out that your quote from the Fannie Mae study reinforces what I said a couple of posts ago... 1% drop, per foreclosure, per neighborhood. If you happen to live in one of the worst hit cities out west, you could easily see dozens of foreclosures in your neighborhood.
7.27.08 @ 2:47p
Take California and Nevada out of the equation and see what the numbers show.
As you quoted, "Foreclosures push all home values down by an estimated 6 percent" -- that's a far cry from 30-40 percent.
I'm not saying severe home value loss isn't possible, but I would argue that it's in isolated areas -- particularly the contentious from the beginning "Inland Empire" developments. Read this report and you'll understand that the devaluation isn't due to foreclosures or defaults, but by hyperdevelopment of overvalued properties during a volatile market. Developers are dropping the prices on these homes by $200,000...around 30-35%.
But if no one has ever actually invested in these homes, then is it legitimate to consider it a devaluation? After all, the initial value was something that a speculative developer assigned to the property to begin with. It's that developer's tough luck that he overbuilt and overpriced his subdivisions.
The short of it is, you can't lump THAT kind of devaluation in with devaluations due to foreclosure on unpaid mortgages; they're apples and oranges.
7.27.08 @ 6:01p
I have yet to see inflation figures in relation to rising home prices from, say, 1960 to 1980.
But when I look at the county evaluation for my property over 20 years, the largest jump in assessment value happened between 1994-1996. After that, it just spiraled out of control. In the 12 years we've owned this house, the county has declared its value $80,000 more than our purchase price. This means our property taxes are allowed to increase, too.
But, as we battled the increase this year and won (two years ago, we didn't), the research uncovered that houses comparable to ours in our neighborhood weren't selling at the county assessment value, but rather $20,000-$40,000 less.
That is a truer rate of marketability than anything speculators say.
Armed with these facts, the county dropped our assessment $16,000. Poof. Just like that. What this indicated is that it was understood the values were inflated, but if they could get it, they were going to.
So pure greed drove the market, rather than absolute value.
7.27.08 @ 6:37p
And that's greed we see mirrored in the oil markets. Only instead of a gradual build-up as in real estate, the oil market only has really skyrocketed within the past 18 months.
But then again, the price of a barrel of oil has dropped more than 16 percent in the past two weeks. Surely we can't consider federal bailouts if the oil bubble bursts, right?
Either matter comes down to people attempting to reach beyond their means. Builders want to sell houses for more than they're worth; people want to buy more house than they can afford; municipalities attempt to overvalue property in order rake in more budget money; creditors lure buyers with bait-and-switch ARMs in an attempt to gobble up all that extra interest.
You can't make idiocy illegal, but you CAN regulate industries to make it more difficult for greedy business practices to flourish.