Going back from homeowning to renting is not actually a terrible fate, and letting it happen is not withholding mercy.

I am extremely opposed to artificially propping up the housing bubble. Almost all of the stories I have heard are of people buying they couldn’t actually afford.

I posted this on another forum about the same topic:

I purchased my first house last year during the subprime craze. Every mortgage lender I talked to was pushing me into ARMs or interest only loans. Most of them before they even ran credit checks. “Gotta get the ARM, you’ll never see interest rates this low again.” Yes I have okay credit, not great, but I’ve heard of and seen a lot worse. A year ago (and I’m sure further back then that) the mortgage lenders in my area were primarily pushing the ARMs and interest only.

I told my wife, and every single one of the mortgage lenders that I would ONLY accept a 30 year fixed loan. My wife and the lenders both said “well a 30 year fixed will cost you more” and I said “not in three years when the ARMs start going up and subprimes start foreclosing”. Wife listened to me, mortgage lenders didn’t believe it would happen.

Finally one of them (I think the fifth) actually listened and didn’t even try to work out an ARM. Got the loan no problem after a mortgage lender actually bothered trying.

Point being in all this is that I hold the mortgage lenders equally culpable to the borrowers.

Devyn,
I’m not complete sure I subscribe to a desserts-based system (i.e., they acted bad, so they deserve whatever comes to them) (they meaning the borrowers, not the lenders Trevor mentions). But even if the borrowers deserve to be foreclosed upon and lose their homes (or, even if they don’t deserve it, but it ought to happen anyway), there are wider repercussions to this whole thing, and the federal government may be concerned with preventing those things.

If there are too many defaults, the investors who purchased the mortgages go bankrupt (already happened to a couple Bear Stearns hedge funds). Housing prices fall. Banks aren’t getting repaid, so credit tightens. Legitimate businesses can’t get loans for legitimate business purposes. Recession happens. Etc.

Not all of these things will happen; maybe none will. But ultimately, the subprime collapse could negatively affect a lot more people than those who foolishly took too-expensive ARMs; it could easily (negatively) affect me and you, in spite of the fact that I’ve never owned a house and have been hoping and wishing that the housing bubble collapses so that I can join the club.

is it too much to ask that we live modestly and within our income?

I realize that the cost of living and actual wages do sinc up but..

if you income isn’t enough to “live” off of (i’m talking about the basics) perhaps buying a home isn’t a wise one?

decision. a wise decision.

Mfranti: why should people be resigned to renting, and enriching someone else? I realize that for the longest time only the wealthy have held property and the poor folk rent (all the way back to medieval times), but–fundamentally–is this right? Is it something we Saints should just accept: namely, that it is the job of the poor to pay their meagre earnings as rent to a landlord who gets ahead while the renter just barely plods along?

The ARMs enticed many marginal people into actually living the dream of owning their own home and land. It is a fundamental desire of most people to not be beholden to someone else for their homes. Unfortunately, usurious lending practices that have become so common actually leave these “poor” people beholden to the banks, who are usually far crueler than any landlord. It is a lose-lose situation for the working class.

Which is why, as stated above, we Saints who are striving for Zion ought to be willing to strive a little harder.

why should people be resigned to renting, and enriching someone else?

for the same reason that some don’t have a car, don’t have computers, or don’t eat potato chips…they can’t afford it.

I realize that for the longest time only the wealthy have held property and the poor folk rent (all the way back to medieval times), but–fundamentally–is this right?

Can I insert health care into that paragraph?

“the people in their 20s and 30s who buy more house than they can afford often do so because there are no houses they can afford!”

are you serious? are you suggesting someone purchase something they cannot pay for?

thank you,

I think you demonstrate why we are having this discussion.

mfranti, they aren’t financially saavy. They see a subprime mortgage as a possible ray of hope that will get them out of the cycle they are stuck in.

But I think I should point out something to you. Do you know which demographic we bankruptcy attorneys are seeing the highest increase in filing rates in?

Age 50 and older.

The growth is not in the 20 to 30 age bracket. It’s retiring baby boomers who have generally worked hard and honestly for their entire lives. Most of my clients have been elderly.

You are operating on preconceived notions here. I’m not sure they are accurate.

By the way, Adam Greenwood posted a very relevant link over on the T&S sidebar:

OK…

That obviously didn’t work…

He titled it “The Bad Incentives of the Poor.”

It’s a review of Charles Karelis’ new book, The Persistence of Poverty. Maybe someone else can get a link to work.

Actually John, I was just trying to explain why a bad loan can seem like a rational choice over renting. It’s important not to assume that the options will look the same to poor people as they look to us. Also, you cannot look at one set of choices in isolation from the other choices and realities facing these people.

I am pretty sure that many folks would disagree with your assertion that buying is superior to renting.

If you living in Boise, maybe. in Manhattan, not so much.

John Mansfield: You will note that I said calling rent wasted money is only partially right, for precisely the reason you mention: it gives you someplace to live for the month. It is only wasted in the aspect of it not getting you ahead. I am sorry if I was unclear.

For the record, at the present time, we rent. We rent an awesome house in an older, nice neighborhood, for a sweet price: less than the interest would cost us, just like you. I am not knocking renting: it has its place. But I do feel a bit depressed sometimes thinking about how our rent money just goes into our landlord’s vacation fund (which he has told us) instead of toward building our own ability to be self sufficient.

#5 Ben There – thanks for the laugh. I was waiting for someone to bring that up…

Trevor – that is a bit scary and is an example of how pushy the brokers were.

Seth – these situations do keep you in business… :)

I think that everyone has teed up the issue here – someone wants to buy a house in a very expensive area and can’t afford it with a traditional mortgage so they get a mortgage that allows them to have the house for a period of time but at the end of that period they can no longer afford it and they likely owe more on the house that it is now worth – what are they to do? I guess walk away as I am not sure the government can do anything for them as sad as it is.

mfranti, I guess I should explain how a subprime mortgage can actually work:

The borrower goes to the subprime mortgage market and finds a lender who isn’t too concerned about his poor credit rating and lack of income and applies for a mortgage. Since the borrower is a bad credit risk, he can’t expect a prime mortgage with a reasonable fixed interest rate and workable payment plan. So instead he gets a subprime loan with an adjustable rate mortgage, and say… a 50 year repayment plan (I kid you not, these lending packages were really popular around here as recently as last year). The mortgage payments are typically very low to start with and most plans require either little or no downpayment.

Now, 50 years sounds ridiculous (probably because it is). But the borrower has no intention of staying in the house that long. Their intent is to stay perhaps 5 years and then cash out in a booming housing market with a tidy little profit that they can then apply towards a better lending arrangement in a more long-term home.

If they manage to accumulate some home equity, it can be borrowed out in a second mortgage which will allow them to increase the value of their “investment” (home improvements) or allow them to make those increased mortgage payments (remember how I said this is an “adjustable” rate mortgage?).

And in the meantime, you get to live in a nice slice of suburbia instead of that roach infested apartment complex downtown.

Very risky. As long as the home buyers market is booming, this scheme can actually work. But the moment the housing market takes a downswing, it starts netting all sorts of foolish borrowers. Of course, such downswings also tend to correspond with higher payments on those adjustable rate mortgages and lenders start to get more gun-shy about their investments. Once things start going bad, they also have a tendency to spiral out of control and just get worse and worse. The whole house of cards comes crashing down.

But back when the market was nice, it looked like a good idea for people a little too wrapped up in short-term thinking.

30 Mfranti: See my post #7.

It is amazing that it is just like the internet bubble of 7 years ago. All things are cyclical and this one will likely drive us into a recession causing all sorts of pain and grief – primarily for the middle and lower classes, then the next bubble will hit – perhaps it already has in ethanol. Then the poor and middle class will chase that bubble and get destroyed again. Not a nice cycle – seems a little Book of Mormon like.

ben, It was your post #7 that started this for me.

“…why cannot our 13-million member LDS church cooperate and help each other avoid home loans altogether? This is not a rhetorical question.”

I was thinking that my idea of living modestly wouldn’t sit well for some and I am not willing to put for the time, talents and money so someone can have a 4500 sf home in Sandy.

The solution is for home prices to go back to their historical and fundamental association with wages. In other words, logically home prices should not exceed wages (i.e., inflation) by more than a percentage point or two. It would be very painful, especially for people who bought in the last few years, but it would get us back on economically sound footing.

Anon – you are right – the bubble will correct itself, just at the expense of a lot of people’s pain and suffering.

What pain and suffering?

Most people won’t get foreclosed on, they’ll just have to live up to the contract they signed and pay more for the house than it is really worth. I don’t feel bad for them, anymore than I feel bad for other people who freely choose pay more for something than it is worth.

People who are foreclosed on will have to move and rent, which they should have been doing all along. I don’t feel bad for them either.

I bought my house in 1979 for $30,000. I got it through Farm Home, qualifying to buy it with no money down, and I paid the closing costs. I did not receive any interest subsidy, just the no money down part. By the time the loan closed, my house was worth $35,000.

I married Bill, he moved in and we struggled to make the payments and raise our kids. It was not always easy, but we did it. Our house is nothing wonderful (it is to us :)), but our kids love it. To them, it is home.

We’ve re-financed three times, I think, twice to re-model and once to get a lower interest rate. We still have a low rate, I think it’s 6.25. We put two bedrooms, a family room, and a tiny bathroom in the basement. Re-did the floors, the kitchen and the upstairs bathroom, painted, etc. etc. Planted trees, put in a fence.

Our payments now are higher than ever, although we hope to pay it off in five years.

As far as I’m concerned, this junky house (you wouldn’t believe the condition when I moved in, holes in the walls, Farm Home had to make them clean up a bunch of crap–garbage all over the lawn) is a gold mine.

I estimate that, counting Bill’s nice shop in back and the really nice wood fence (to the tune of $8000), our house is worth at least $200,000. I know it would be more in some areas, but that’s the median price here.

I’m very grateful for the government program that made it possible for me to buy this home. It’s meant security to me after my transient childhood. I never took advantage, but I’m glad I was given the advantage. If you know what I mean.

I think we live in perilous times. Credit, all kinds of it, tempt people. I feel sorry for the people you mention, Devyn–not to the tune of bailing them out. But because they don’t realize what a gift they were given when they bought their house and don’t have the backbone to do everything in their power to keep it.

Actually, I feel sorry for all the young people just starting out today.

I’m becoming more socialist as I get older. I think people should be given every opportunity possible. Not a handout. And if they can’t do their part, no I don’t believe the government should pay their bills.

And, if big banks go under, who suffers most? A few bank execs? Hardly. How about the retirement accounts of millions of Americans who have invested in those banks.

So is a bailout of the banks the only reasonable thing the government CAN do, in light of the domino effect that goes into play as soon as banks start falling and taking with them hundreds of thousands of middle class Americans, investors, and numerous other casualties?

living in los angeles this has been a huge deal for me. for at least 3-4 years know i’ve believed that prices were too high and had to come down, but was continually frustrated and perplexed upon seeing them continue to go up 20%+ per year. i’m at the age where i should be in a home already, but you couldn’t find anything in a neighborhood you’d want to live in for anything less than $700k.

i really lay the blame at wall street and the mortgage lenders and government regulators. most regional markets should have peaked around 2004, but due to the insatiable demand for MBS’, CDO’s, etc. by institutional investors wall street basically told the lenders to go crazy and drop all lending standards, resulting in products like 1 and 2 year ARMs, interest-only ARMs, 100%+ financing (in case you can’t even scrape together closing costs), option ARMs (don’t even pay all of the interest, we’ll just tack it onto the principal), and worst of all, no doc loans (sure, just write down here on the application what you make and we promise not to verify it). because nearly all of the lenders didn’t hold the loans but merely sold them off they didn’t feel the risk like they did in past booms.

that’s when prices started to really go crazy. how any rational person could look at that and not see that it was going to end badly is beyond me. and although it was nice for a lot of people the country to see their homes rise in value, we would have been much better off w/ more moderate, steady growth in prices than a bubble and crash. that’s where the gov’t comes in. they needed to step in two or three years ago and regulate the mortgage lending industry more tightly since it was painfully obvious that they weren’t going to regulate themselves. but now instead we have a cluster***k that’s going to take years to run course and cause a lot of collateral damage in the process. a recession is pretty much in the bag.

there is definitely a moral hazard involved w/ any kind of bailout, but the gov’t will have to act like it’s doing something or people will revolt. personally i’d like to see the market work itself out w/ the gov’t putting regulations in place in order to keep this from happening again. any intervention will likely only prolong the recovery. besides, most bailout plans are ultimately aimed at propping up values, but that’s exactly what we don’t need. and i think that the problem is too big and too expensive for the gov’t to be able to do much anyway.

the housing market will not be healthy again until we see significant declines in value (especially in places like los angeles) bringing values more in line w/ what incomes can afford.

if anyone is interested in some really great commentary on the housing and mortgage markets, or just wants to understand what’s happening in great detail, there’s a wonderful and well-written blog called calculated risk that you should check out.

When I moved to southern California three years ago, everyone was telling me to wait until all the interest-only home loans people had taken out to buy houses changed and they weren’t able to afford their payments, because then everyone will be trying to sell and prices will come down. (If people knew this years ago, why wasn’t anything done about it?)

Prices are coming down a tiny bit. Instead of $700-750K, we’re seeing $650-700K. Well, maybe not, I haven’t paid that close attention—it depends on how big the house is. I’m sure many are still listed at $750.

We see so many houses for sell everywhere, it’s crazy. And we keep asking ourselves, who can afford these houses? I don’t get it. The people I know who own homes here bought them years ago when they were still affordable. Who’s buying homes now?

Who’s buying homes now?

not very many people. and as it looks like the lenders are quickly retreating to the lending standards of yesteryear (document income and assets, require at least some down payment in order to get a decent interest rate) your going to see sales drop even further down here. give it a few years and houses will be much more affordable, there’s really no other plausible outcome from this.

Thanks for the info Mike D.

Daylan – Not sure where you are coming from – it sounds like you think people who are in foreclosure are all fools. That is a broad brush to paint – perhaps some of them were foolish, others were duped, while others have likely lost their jobs, etc. So be careful who you are calling foolish as these are people with real lives that are being put into disarray. I don’t think a bailout is likely nor feasible, and the market will correct itself.