Homeownership Cannot Be a God Given Right
There are many lessons to be learned from the mortgage debacle of 2007-2008, so let's list a few: Wall Street can't be trusted (that's obvious), loan brokers aren't boy scouts (duh), payment-option ARMs are dangerous (a given), and my personal favorite: home prices cannot rise by 20% a year forever.
The subprime business as we came to know it over the past eight years is over. We all know that. The only subprime-related loans being funded are being sold to Fannie Mae or Freddie Mac, which are now (and rightfully so) tacking on new delivery and guarantee fees to cover the risk they're taking on. The other type of subprime loans being funded are "hard money" mortgages where the borrower has at least 70% equity in the home and is refinancing because he or she really needs the money.
One of the Baldwin boys (Rick) who used to work at LIME Financial is now running a subprime/hard-money shop called Excelsior Fund. "We're doing bridge loans and equity loans," Mr. Baldwin told us. "We prefer not to call it 'hard money.'"
In other words, we're going back to the days of the 1960s and '70s when subprime was a much smaller niche business and the originators are either keeping the loans themselves or partnering with an investor - like a doctor, dentist, lawyer or hedge fund. If you think Wall Street is waiting to jump right back into subprime then I have some Enron bonds I'd like to sell you.
But I'm getting off track a bit. I was talking about lessons learned. There's been a ton of excuse making over the past year. Here's my favorite, which I will paraphrase: the president of the United States wanted us to increase the homeownership rate and to do so we created "affordability products." Calling a loan an affordability product is like referring to napalm as ant spray. (POAs give consumers four different payment choices each month including negative amortization where they can keep their monthly payments artificially low by adding on to the debt owed.)
This leads to my next point. What came first: the chicken or the egg? Escalating home prices or the payment-option ARM? After covering POAs for several years - I've written about them in this column before - I've come to the conclusion that these loans were one of many reasons why home prices rose so rapidly in once-hot markets. The homebuyer was told by the Realtor or loan broker (or both): "You can buy more house because your payments will be lower." It empowered homebuyers to bid up prices.
Maybe it's obvious but I think it needs to be stated that POAs, 80/20s, no-downpayment loans and stated-income mortgages all allowed people who should not have received mortgages to get one. By having so many buyers armed with mortgages it was inevitable that home prices would go up - especially in the most desirable markets. What came first - escalating home prices or the POA? Answer: POAs. Without these and other nonprime (not necessarily subprime) mortgages, none of this would have happened.
But it did happen which leads to my next point. Why, as a public policy issue, should we encourage Americans who aren't financially ready, to own a home? I know the argument: if you own your own home you're less likely to burn down the neighborhood. Yeah, I get it. I remember what happened in the South Bronx back in the 1970s, too.
I will argue this - homeownership is something that Americans and immigrants living here should earn. It's not their God given right. If they want to own a home, they should scrimp and save just like my wife and I did and just like our parents did before us. That means giving up the big-screen TVs, the trips to Vegas, the double lattes at Starbucks, the $10 lunches and all the other junk people buy that they don't really need. (Do we really need I-phones?) Visit the deli section and buy cold cuts for lunch. You'll save $50 a month right there.
We need to go back to a mortgage system where downpayments are the norm - not the exception and we don't need a bunch of loan brokers, Realtors, elected officials and Wall Street experts telling us otherwise. I say 3% minimum for all downpayments, FHA or otherwise. If a couple can't come up with 3% then they should do what 32% of the population does: rent. There's an added bonus to renting: if the toilet breaks it's the landlord's problem, not yours.
Based in Washington, Paul Muolo is executive editor of both National Mortgage News and Mortgage Servicing News. He can be e-mailed at Paul.Muolo