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I think it is better to put down a 20% down payment.
When I bought my house, I didn't want to put 20% down. I could have, but I just didn't want to tie that much money up in a house. Then I took a look at PMI....not just the monthlies, but the cost at closing. I was astonished how much money it was for something that benefitted me absolutely zilch.
Yes, that is a good point.
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Remember, when you take a mortgage, you are essentially telling the bank, "I want this house, but can't quite afford it. Can you front me some of the money and I'll pay you back?" and the bank says, "Yes, I will do that if you give me the money back plus this much interest." As the consumer, you are free to accept or decline the bank's offer. But all the bank is doing is fronting you money for an investment you are choosing. They are not accepting any of the risk with the structure or value of it, aside from the knowledge that they will be stuck with it if you skimp out.
I don't understand why people think banks owe them anything when at the end of the day, what they are really doing is enabling you to purchase something that you are currently unable to do yourself. It's really not the bank's job to be your financial advisor and tell you what you can afford. They don't know your spending habits and how dumb or smart you are. All they tell you is what they will approve you for and give you an interest rate based on what kind of risk they think you are. It's up to you to figure out what you can actually afford.
It is not the bank's job to tell you what you can afford, but a bank that cannot accurately assess risk and loans you more than you can afford will fail unless bailed out or unless they can unload the mortgage to someone else unable to assess risk. In the recent crisis, lenders were able to offload low quality loans because they were repackaged and labeled as AAA investment grade. Eventually, there was a general realization that the loans were actually junk and the whole game collapsed. The banks and mortgage lenders would have simply failed if not bailed out.
Banks need to evaluate your risk of default, including risks due to job loss, property loss, market changes, etc. and charge an interest rate that yields an expected positive return for the bank. That does not mean that individuals should continue paying a mortgage when it is no longer in their best financial interest. It is not at all immoral for a person to mail in the keys when that is their best option. The option of default is considered when banks computed the expected value of the loan.
Nobody expects businesses to do something that is not required out of some sense of economic ethics, so I am not sure why this is expected of individuals. GE did not pay taxes last year despite billions in profits. The tax code allows this, so they did nothing wrong. The correct response is to change the tax code and not to expect them to cut a check to the treasury out of some sense of ethics or duty. Similarly, an expectation that a borrower will continue paying on a mortgage when that no longer makes financial sense for the borrower and they have a contractual exit clause (a default) is just as naive as expecting GE to pay taxes that they do not owe.
Ultimately, the banks were bailed out at public expense and the borrowers were not. Whether or not that is fair or ethical is debatable, but that is what happened. Foreclosures will stay elevated until all of those bad loans are flushed out of the system and I would expect that housing prices will remain under pressure until that process winds down. If the following chart is to be believed, then most of the low quality loans will have at least hit their reset date by the end of 2012, although who knows how often the resets will lead to foreclosure. The option ARMs in particular will almost always be associated with an underwater mortgage because most borrowers will have bought in 2007 and not paid down any of the principal or may have even added to the principal with lower-than-interest payments. However, many of the option ARMs have already defaulted even without a reset, so perhaps the hemorrhaging is almost over.
That does not mean that individuals should continue paying a mortgage when it is no longer in their best financial interest.
I have to disagree with this.
If you buy a car, then go out and wreck it, does that mean the best thing to do is simply let the bank come repo the car?
If you buy a gold necklace on your American Express and then the value of gold drops, does that mean you simply do not pay your AMEX bill?
If you adopt a dog and the dog has parvo and the treatment costs more than the adoption fee, do you let the dog die?
If you get cancer treated at the hospital, but then the cancer comes back, do you just not pay the hospital bill?
Life is full of risk. It's natural for people to want to try to pin the downside on someone else, but the truth is, that risk is yours. If you buy a house and the house doubles in value and you sell it in 2 years, the bank who gave you a mortgage doesn't come and take part of your gains away, does it? Well, if you're going to pin the downside on the bank, wouldn't it be fair to also allow it to partake in the up side?
Some of my examples may be more extreme, but you understand the principle I'm trying to show.
I really don't care if people can't pay their mortgages or decide not to and get foreclosed on. If it's due to job loss, I feel really bad for the person. If it was financial irresponsibility, I feel bad the person is that stupid. Either way, however, the person has to just accept the fact that they ain't buying squat for the next 7 years and take it without whining that they were victimized and it's all the bank's fault. It's either your fault, or you were just the victim of crummy circumstances, but you can't escape the responsibility of it.
Anyway, I do completely agree with you that the banks shouldn't have been bailed out. I don't believe in bailouts. Not for banks, not for insurance companies, not for airlines, not for automobile manufacturers, not for anything. Letting things like this fail no doubt cause immediate intense pain, but after a few years, we emerge stronger for it.
I suppose there's no way to tell for sure, but I happen to personally believe that if George Bush hadn't bailed out the airlines 10 years ago we would have much better carriers today that have better records of operating on time and don't charge you for checking baggage. Travel would have totally sucked for a few years, the economy probably would have taken a hit, and it would have been really bad for a while....but by now, we'd be in a better place. We would have a bunch of slick start-ups that understand the market and react to it swiftly instead of the old dinosaurs we have now which offer their way or the highway. I can't prove this is what would have happened, it's just what I think.
I feel the same way about the banks. If they wrote bad mortgages....let 'em fail!
If you buy a car, then go out and wreck it, does that mean the best thing to do is simply let the bank come repo the car?
No, but lien holders require borrowers to carry insurance for exactly this reason. Car loans are collateralized, so if you saw cases where people were $100K under water on car loans, then yes, you would see strategic repos. Cars have the benefit of having a basically fixed depreciation schedule, which makes risk assessment easier for the lender.
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If you buy a gold necklace on your American Express and then the value of
gold drops, does that mean you simply do not pay your AMEX bill?
No, but credit cards are not collateralized loans. You can't give the necklace back in lieu of payment.
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If you adopt a dog and the dog has parvo and the treatment costs more than the adoption fee, do you let the dog die?
No, but this crosses from business contracts to morality.
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If you get cancer treated at the hospital, but then the cancer comes back, do you just not pay the hospital bill?
No, but again this is not a collateralized loan, or even a loan at all. The service has already been rendered.
I certainly agree that in the case of foreclosure the borrower's credit will/should take a hit and they have no right to complain. I am not suggesting that the loan should be forgiven or that you should feel sorry for them. They took the risk. However, a mortgage is a collateralized loan with the legal option of default, with its associated consequences, in lieu of payment. Electing default when that is the best option is not an issue of morality.
We must expect that people will act in their financial interest in order to have a stable financial system. Correspondingly, the bank also has no right to complain if they are left holding a house worth less than the loan principle - they took that risk. The equilibrium point of both borrowers and lenders simultaneously acting in their best interests in a non-distorted financial market will yield a stable housing market. We are somewhat closer to that now that banks are being slightly more careful with lending, but the market is still distorted by Frannie Mae and Freddie Mac encouraging bad loans at taxpayer expense. In the long run, the housing market would be more stable if interest rates were above zero, the mortgage interest tax deduction were eliminated, and Frannie Mae and Freddie Mac were dissolved. Then, prices would be forced to adjust to what people could actually afford. How quaint that would be.
You're right, allowing a foreclosure can be a strategic decision and the bank did assume that risk. Defaulting on your loan is a legal option, and the bank gets your house; you don't go to debtor's prison.
I get angry when people try to pin all the blame on the banks. If anything, it's the government's fault for backing so many bad loans with Fannie and Freddie and by selling home ownership as a right and the American dream.
You're right, allowing a foreclosure can be a strategic decision and the bank did assume that risk. Defaulting on your loan is a legal option, and the bank gets your house; you don't go to debtor's prison.
I get angry when people try to pin all the blame on the banks. If anything, it's the government's fault for backing so many bad loans with Fannie and Freddie and by selling home ownership as a right and the American dream.
That didn't exactly happen in a vacuum. Decades of heavy lobbying by banks, builders, realtors, and the GSEs put everyone on one side of gamble. Fannie/Freddie originally only bought conforming loans (hence the name) which had debt/income and doc requirements. If you have verified income and debt ratio below 45%, you generally won't default short of a major loss of income.
The banks invented CDOs in the late '80s that allowed banks to slice/dice mortgages to separate investors depending on their risk tolerance. It wasn't until the late '90s that the Gramm–Leach–Bliley Act let banks become financial supermarkets that both loaned money to consumers and construct complex financial instruments in-house that they really took off. Alt-A and Subprime borrowers prior to the early '00s couldn't come close to getting a loan w/o a huge down payment and double/triple prime loan rates. You were a leper to the banks if you didn't have a 700+ FICO score.
Once they could slice/dice/sell these loans based on risk tolerance and had a ready supply (BOA, Wachovia, Citi and all their thousands of branches writing mortgages), banks had an insatiable appetite for high risk/high return loans since they could wrap them up and sell them off. We're talking about loans that Fannie/Freddie/FHA wouldn't normally touch w/a 10ft pole. No documents, no income, massively inflated home valuation, and option ARM rates were all reckless factors they actively ignored trying to get higher risk premiums. Add in the federal reserve trying to stave off a recession post 9/11 by holding interest rates low, and banks had billions of risk free capital they could lend for mortgages.
Fannie/Freddie in all their infinite wisdom saw all the profiteering in subprime and decided they wanted in. They got the gov't to OK the classification of subprime loans CDOs as part of their minority/low income support. This was cheaper and had a perceived lower risk than actually finding low income/minority borrowers. At that point, they started buying up these subprime mortgages by the billions and banks started churning them out even faster. The result was that minorities increased home ownership as did speculators since you could get a loan for anything w/o any money. When the music stopped, Fannie/Freddie had billions of these loans (as did many banks that created a ton of inventory they had planned to sell). The difference is that Fannie/Freddie actually hold many loans for the life and that's virtually their entire business. Given the recession, even conforming loans got hit really hard which meant Fannie/Freddie look far worse than banks which are able to rack up other revenue.
Not saying the GSEs aren't culpable but they're just one party to the multidimensional clusterf*** that is our financial crisis. This also kind of skips over insurance companies (AIG) insuring these CDOs letting foreign banks treat them as capital they could lend against. Personally I blame Senator Gramm...dude's an economist and this was his crown piece of legislation before he took a 7 figure job w/ UBS.
OK, I see what you are saying. Thank you for clarifying.
Translation: Everything is cool now that OP has clarified that he is solely placing blame on reckless lenders and absolving deadbeat borrowers who don't want to take responsibility for their actions.
That didn't exactly happen in a vacuum. Decades of heavy lobbying by banks, builders, realtors, and the GSEs put everyone on one side of gamble. Fannie/Freddie originally only bought conforming loans (hence the name) which had debt/income and doc requirements. If you have verified income and debt ratio below 45%, you generally won't default short of a major loss of income.
The banks invented CDOs in the late '80s that allowed banks to slice/dice mortgages to separate investors depending on their risk tolerance. It wasn't until the late '90s that the Gramm–Leach–Bliley Act let banks become financial supermarkets that both loaned money to consumers and construct complex financial instruments in-house that they really took off. Alt-A and Subprime borrowers prior to the early '00s couldn't come close to getting a loan w/o a huge down payment and double/triple prime loan rates. You were a leper to the banks if you didn't have a 700+ FICO score.
Once they could slice/dice/sell these loans based on risk tolerance and had a ready supply (BOA, Wachovia, Citi and all their thousands of branches writing mortgages), banks had an insatiable appetite for high risk/high return loans since they could wrap them up and sell them off. We're talking about loans that Fannie/Freddie/FHA wouldn't normally touch w/a 10ft pole. No documents, no income, massively inflated home valuation, and option ARM rates were all reckless factors they actively ignored trying to get higher risk premiums. Add in the federal reserve trying to stave off a recession post 9/11 by holding interest rates low, and banks had billions of risk free capital they could lend for mortgages.
Fannie/Freddie in all their infinite wisdom saw all the profiteering in subprime and decided they wanted in. They got the gov't to OK the classification of subprime loans CDOs as part of their minority/low income support. This was cheaper and had a perceived lower risk than actually finding low income/minority borrowers. At that point, they started buying up these subprime mortgages by the billions and banks started churning them out even faster. The result was that minorities increased home ownership as did speculators since you could get a loan for anything w/o any money. When the music stopped, Fannie/Freddie had billions of these loans (as did many banks that created a ton of inventory they had planned to sell). The difference is that Fannie/Freddie actually hold many loans for the life and that's virtually their entire business. Given the recession, even conforming loans got hit really hard which meant Fannie/Freddie look far worse than banks which are able to rack up other revenue.
Not saying the GSEs aren't culpable but they're just one party to the multidimensional clusterf*** that is our financial crisis. This also kind of skips over insurance companies (AIG) insuring these CDOs letting foreign banks treat them as capital they could lend against. Personally I blame Senator Gramm...dude's an economist and this was his crown piece of legislation before he took a 7 figure job w/ UBS.
This is an excellent post, but this side of the debacle has been well covered in the media. The origins of the bubble have been scrupulously avoided.
Liberals wanted to increase lending to minorities, so they "encouraged" researchers to give them something to work with. On cue, the Boston Fed produced Mortgage Lending in Boston: Interpreting HMDA Data, which concluded that lenders were discriminating against worthy minority borrowers. The paper's thesis was easily refuted, but the refutation was ignored and the ball was set in motion. Phase 2 is described in your post above.
This is an excellent post, but this side of the debacle has been well covered in the media. The origins of the bubble have been scrupulously avoided.
Liberals wanted to increase lending to minorities, so they "encouraged" researchers to give them something to work with. On cue, the Boston Fed produced Mortgage Lending in Boston: Interpreting HMDA Data, which concluded that lenders were discriminating against worthy minority borrowers. The paper's thesis was easily refuted, but the refutation was ignored and the ball was set in motion. Phase 2 is described in your post above.
Doesn't the recent record settlement by BOA over minority discrimination by the former Countrywide suggest there was in fact an issue. $300M+ buys a lot of lawyers to fight such charges if they thought it was an easy out.
It's not particularly difficult to see if minorities were charged more than whites for given credit/income/debt data. If you plug in all the decision factors in a mortgage and then separate by race...you can probably figure out on a given day if a minority was charged more than a white person w/ identical credit profile. Honestly I don't think it was a systemic attempt to profiteer off minorities since by the time higher ups see mortgages, they just see at most a name/address/credit data. The only they'd be able to tell is certain loans were more generous for themselves and how fat a bonus the broker earned for themselves. It's far more likely local mortgage brokers picking up that minorities tended to be less savvy to all the options available to them and would wind up w/ less than optimal loans. If the banks didn't actively attempt to prevent this, they probably deserve a bit of a haircut since it is and has been explicitly illegal.
Having worked in the financial tech industry, I know race data isn't in the file but that's not to say they can't reverse engineer some decision factors that are discriminating against minorities. With all the data out there, they could correlate shopping patterns, existing credit lines, and even student loan patterns toward figuring out a person's race and determining lending that way. I was actually surprised to learn that Equifax had a geocoded demo data they sold for extending credit terms in Canada for people w/o established credit or thin files. Imagine using this in the US...deny credit for a few people in minority dominated zip codes and the lawyers would absolutely own the banks.
On another note, I'm not for the overt push for unqualified people (of any race) to buy homes. I can see there was empirical evidence of discrimination in the past but that's not a free pass to hand out mortgages to anyone of color. Also...plenty of non-minorities jumped in very big on the housing bubble. Of the many amateur real estate speculators I've met through the years who were very big on creative financing, not a ton of them were minorities. Most were otherwise financially stable people who just got very drawn into the get rich quick schemes that "financial gurus" touted everywhere. Don't forget about all those classes Robert Kiyosaki and his ilk sold for years in the 00's pushing passive income by buying up homes w/ zero down and renting at impossible rates.
Another person in my neighborhood has gotten a job in San Francisco (third one in less than 12 months). They have owned their home less than 3 years and the relocation appraisal has come in 40,000 less than what they paid. About a 15 percent decline. His package includes the new employer making them whole, so you better believe they are going to sell that house quickly at a lower price.
When I went on my morning walk today, there were three homes for sale that weren't on the market as of Friday. A friend who is a Realtor believes that many people aren't going to wait for Spring, because they believe the market will be flooded with homes by then.
I would think the reason for the decline is due to foreclosures... why so many foreclosures? I'm sure it has something to with the area adding nearly 1 million people in the last 10 years despite significant job growth.
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