Sunday, November 16, 2008
The Myth of Home Ownership
According to the Mortgage Bankers Association, over a quarter of all mortgages originated from 2005 to 2007 were interest only. Freddie Mac estimated that about 15% of the mortgages in its portfolio on Sept. 30, 2007, had loan-to-value ratios above 90%.
Of course, these so-called "homeowners" don't own their homes at all. Typically, these borrowers took interest-only, piggyback and adjustable-rate mortgages so they could "buy" larger homes than they could otherwise afford.
Moreover, there are three important distinctions between low-equity mortgagers and renters:
In summary, the game is rigged in favor of the riskiest borrower -- the low-equity interest-only mortgager -- who gets all the upside potential, with little downside risk.
Yet today, the entire machine of government is revving up "to keep current homeowners facing unaffordable resets at the starter rates to help them stay in their homes." Will renters facing eviction get a government bailout? (Laugh -- that was a joke.)
The roots of the subprime problem trace back at least to the mid 1990s when the Clinton administration and Congress (including Representative Barney Frank) began a push to expand home ownership, particularly among lower income Americans. Gretchen Morgenson documents this in "Building Flawed American Dreams" (New York Times, 10/18/2008), an article and series well worth reading.
Unfortunately, the Tax Foundation reports that 36% of home-mortgage interest deductions were claimed by taxpayers whose adjusted gross income was greater than $100,000, even though those taxpayers accounted for fewer than 10% of tax returns. The bulk of the tax subsidy goes to wealthiest Americans.
Alan Greenspan rang the alarum, albeit quietly, in his June 9, 2005, testimony to Congress:
While many real-estate experts and economists warned of the dangers of these loans, Congress, the GSEs and the Federal Reserve chose a Panglossian optimism that at the time seemed wishful thinking, and in hindsight would be laughable if not so tragic. Alan Greenspan summed it up in his 2005 testimony:
They tell us the TARP will work, too. Keep laughing, folks. Otherwise you'll start crying. And it only gets worse from here.
--GAHjr
Of course, these so-called "homeowners" don't own their homes at all. Typically, these borrowers took interest-only, piggyback and adjustable-rate mortgages so they could "buy" larger homes than they could otherwise afford.
Moreover, there are three important distinctions between low-equity mortgagers and renters:
1) The mortgager receives a government subsidy on his "rent" through mortgage interest deductions. The renter gets nothing.
2) The mortgager profits handsomely if the property appreciates, and can even escape capital gains taxes if the profits are rolled into a new residence.
3) In the event property values fall, the low-equity mortgager gets forbearance, a long foreclosure period, at the end of which he hands over the keys to the lender and walks away after months or even years of free rent, nothing lost, free and clear. The renter who falls behind in his rent, on the other hand, will be out on the street within weeks or months, and dogged by the landlord's attorneys for years to come.
In summary, the game is rigged in favor of the riskiest borrower -- the low-equity interest-only mortgager -- who gets all the upside potential, with little downside risk.
Yet today, the entire machine of government is revving up "to keep current homeowners facing unaffordable resets at the starter rates to help them stay in their homes." Will renters facing eviction get a government bailout? (Laugh -- that was a joke.)
The roots of the subprime problem trace back at least to the mid 1990s when the Clinton administration and Congress (including Representative Barney Frank) began a push to expand home ownership, particularly among lower income Americans. Gretchen Morgenson documents this in "Building Flawed American Dreams" (New York Times, 10/18/2008), an article and series well worth reading.
Unfortunately, the Tax Foundation reports that 36% of home-mortgage interest deductions were claimed by taxpayers whose adjusted gross income was greater than $100,000, even though those taxpayers accounted for fewer than 10% of tax returns. The bulk of the tax subsidy goes to wealthiest Americans.
Alan Greenspan rang the alarum, albeit quietly, in his June 9, 2005, testimony to Congress:
"The dramatic increase in the prevalence of interest-only loans, as well as the introduction of other relatively exotic forms of adjustable-rate mortgages, are developments of particular concern. To be sure, these financing vehicles have their appropriate uses. But to the extent that some households may be employing these instruments to purchase a home that would otherwise be unaffordable, their use is beginning to add to the pressures in the marketplace."
While many real-estate experts and economists warned of the dangers of these loans, Congress, the GSEs and the Federal Reserve chose a Panglossian optimism that at the time seemed wishful thinking, and in hindsight would be laughable if not so tragic. Alan Greenspan summed it up in his 2005 testimony:
Although we certainly cannot rule out home price declines, especially in some local markets, these declines, were they to occur, likely would not have substantial macroeconomic implications. Nationwide banking and widespread securitization of mortgages make it less likely that financial intermediation would be impaired than was the case in prior episodes of regional house price corrections. Moreover, a substantial rise in bankruptcies would require a quite-significant overall reduction in the national housing price level because the vast majority of homeowners have built up substantial equity in their homes despite large home equity withdrawals in recent years financed by the mortgage market.
They tell us the TARP will work, too. Keep laughing, folks. Otherwise you'll start crying. And it only gets worse from here.
--GAHjr
