Second Homes 411

Monday morning rant:  “Government Saves Capitalism”

I have mixed feelings about the Sunday afternoon ’so-called rescue’ of FNMA & FHLMC. As a mortgage lender, any relief, short term, might help put some grease on the lending machine and get money flowing in The US mortgage markets again, but grease from the Government goes against my capitalist ideals and always costs more in the long term. Like borrowing from Cousin Vinny, you really want to take a pass.

“Too big to fail” is certaintly true, if FNMA/FHLMC had a fire sale of $7 trillion worth of mortgage loan assets, it would cripple the world financial markets. But what are we really talking about? Is the entire FNMA/FHLMC portfolio in dire straits trouble?

Doing the math, 1.8 million mortgages in the US are in some state of ‘foreclosure’.  This is still less than 2% of the over all market, meaning that 98% of the loans are paying monthly payments. It is estimated that 1.2 million of those loans are backed by ’speculative’ properties. These are real homes/condos/land that is likely vacant and was an investor (maybe ma & pa type investors albeit) that will loose money if the bank takes back the property, but presumably no families will be put out on the street. When the lender takes back ownership of these properties, they get a tangible asset that can be rented or resold. Some other investor will buy a heck of a deal. There is some ‘recovery’ and again maybe a loss to the lender, but not a total loss of capital invested.

Next, the statistics tell us, 600,000 of the homes are occupied.  Many of these are family occupied dwellings, which is very sad indeed. But many of these home buyers purchases in the last 2-5 years, when real estate was appreciating at record rates, and they put little to no money down. They were encouraged to buy with ‘creative’ mortgages that told them they could afford higher than traditional payments, as a bet on the long term appreciation of the market. They have little money invested and in many cases will stay in the homes for 12-14 months with no rent/mortgage payments, before they are foreclosed.

Bets sometimes fail to win. ‘Bets’ often loose. When a family goes from renting to owning, this is The American Dream, what do you call it when they move back to an apartment? If they invested a lifetime of savings in a home, this is tragic. If they put zero down, and lived rent free for a year it is a (quasi) Government  experiment with people’s lives and expectations?

If you bought a home with nothing down, did you really buy a home or were you renting with an expectation of future ownership?  Many people will call me harsh, insensitive and evil for uttering such a statement. In 2005, the Chicago Tribune quoted me as condemning zero down loans, people hated me for speaking up, the mortgage business made alot of money making zero down loans.

FNMA had a mandate to increase the level of home ownership in America - they were broadening their market size. As one of the foot solidiers in this fight, I too believe that owning a home is a big financial win, but I have always believed that it was important to invest a ‘real’ down payment on real estate - and that prices don’t always rise in the short term. If many of today’s home owners had put 10% or more money down, they would not be giving their homes back to banks, and the mortgage crisis would not be a crisis. In a developing country we would describe Sunday’s action by our government as a ‘taking’ and a frightening move toward socialism.

Are we discarding capitalism in favor of another government experiment? Let’s hope this experiment turns out better than the mandate that every American owns a home and “a chicken in every pot.” For those free government chickens always come back to roost or roast.