Speaking as we have been about mortgages, I just ran across this article (at the Consumerist) about "pay-option" mortgages, an especially insane form of mortgage where you have the option to capitalize payments instead of paying them. These are illegal in most states, but not everywhere, and apparently Countrywide issued quite a lot of them.
A lot of wind has passed about the mortgage crisis, and about people who are stuck in bad option ARM or interest-only loans. This is commonly presented as a "crisis for homeowners", with at least one presidential candidate calling for an "interest rate freeze" (which I am interpreting as a prohibition on lenders exercising the ARM option). One of the widely ignored aspects of this, however, is that most of these high-risk mortgages are on property that is not owner-occupied. For example, there has been a lot of talk about high default rates in Florida, but little notice is taken of the fact that two-thirds of the defaults are on property that is not occupied by the owner: that is to say, property which is being held by a landlord as a speculative investment.
Let me go on record as saying that I am adamantly opposed to any form of mortgage relief that acts to the benefit of real estate speculators. Yes, fine, provide foreclosure protection for those homeowners living in owner-occupied housing with a bad mortgage. A lot of them were suckered into either buying houses they could not afford (but should have been able to except for ridiculously inflated real property values), or into accepting mortgages they could not afford by unscrupulous dealers (and in some cases through outright fraud). But I have little sympathy for people who buy residential property, mortgage it to the hilt with an interest-only or ARM loan, and hire a scumbag property management company to manage it for them, all with the main intent being to cash in on the increase in property value in a few years (the rental income on such properties being usually just barely enough to cover the mortgage interest, taxes, and management fees). These people are real estate speculators. They played the game, and they lost. There is absolutely no reason for the government to bail them out. Their tenants will not be immediately displaced by a foreclosure as leases generally survive changes in ownership of the leased property (while most banks will attempt to break leases if they can, and usually do, we could forbid banks from doing so and I would support such a measure if necessary), so nobody is being "forced from their homes" anyway.
It bothers me that we're seeing such widespread calls for sympathy for people who basically took a calculated business risk and got burned by it. If there's to be any bailout for the owners of non-owner-occupied homes, it has to be predicated on a finding that doing so is necessary to preserve the housing industry and/or the economy. And I suspect there are better ways to deal with it. Quite frankly a large part of the run-up of the housing bubble has been caused by real estate speculators; they should be sharing in the pain, not getting a pat on the back from the government.
A lot of wind has passed about the mortgage crisis, and about people who are stuck in bad option ARM or interest-only loans. This is commonly presented as a "crisis for homeowners", with at least one presidential candidate calling for an "interest rate freeze" (which I am interpreting as a prohibition on lenders exercising the ARM option). One of the widely ignored aspects of this, however, is that most of these high-risk mortgages are on property that is not owner-occupied. For example, there has been a lot of talk about high default rates in Florida, but little notice is taken of the fact that two-thirds of the defaults are on property that is not occupied by the owner: that is to say, property which is being held by a landlord as a speculative investment.
Let me go on record as saying that I am adamantly opposed to any form of mortgage relief that acts to the benefit of real estate speculators. Yes, fine, provide foreclosure protection for those homeowners living in owner-occupied housing with a bad mortgage. A lot of them were suckered into either buying houses they could not afford (but should have been able to except for ridiculously inflated real property values), or into accepting mortgages they could not afford by unscrupulous dealers (and in some cases through outright fraud). But I have little sympathy for people who buy residential property, mortgage it to the hilt with an interest-only or ARM loan, and hire a scumbag property management company to manage it for them, all with the main intent being to cash in on the increase in property value in a few years (the rental income on such properties being usually just barely enough to cover the mortgage interest, taxes, and management fees). These people are real estate speculators. They played the game, and they lost. There is absolutely no reason for the government to bail them out. Their tenants will not be immediately displaced by a foreclosure as leases generally survive changes in ownership of the leased property (while most banks will attempt to break leases if they can, and usually do, we could forbid banks from doing so and I would support such a measure if necessary), so nobody is being "forced from their homes" anyway.
It bothers me that we're seeing such widespread calls for sympathy for people who basically took a calculated business risk and got burned by it. If there's to be any bailout for the owners of non-owner-occupied homes, it has to be predicated on a finding that doing so is necessary to preserve the housing industry and/or the economy. And I suspect there are better ways to deal with it. Quite frankly a large part of the run-up of the housing bubble has been caused by real estate speculators; they should be sharing in the pain, not getting a pat on the back from the government.
Option ARMs aren't any more insane than renting. In fact, they're fairly similar - your payment fluctuates each year and generally goes up.
ReplyDeleteThe problem with Option ARMs is that they usually have very high interest rates compared with a Hybrid ARM or a Fixed Rate loan. The negative amortization feature is pretty useful for people who escape from renting.
Speaking of the evils of real estate speculation, consider the situation here in Australia, where there is a very generous capital gains tax structure along with an income tax system that not only permits but encourages negative gearing. This ensures that most investment in rental property is by those with large incomes (who do so to dodge income tax) and is almost entirely speculative (something like 90% of such properties are existing properties).
ReplyDeleteWorse, the financial institutions encourage large-scale borrowing to achieve this, so not only are low-income owners and first home-buyers largely priced out of the market (by speculation in existing residences), when they do come to buy they face a high price of credit.
Unfortunatly Option ARMs were also sold to a lot of uneducated homeowners by greedy loan officers. Lenders encouraged, in the form of commission, loan officers to sell these loans to everybody.
ReplyDeleteReal Estate investors did play the game and they did lose, so I agree that they should suck it up and take the loss.
Uneducated homeowners who live in the property should have an option of receiving some form of government loan which would make the PITI payment affordable to the homeowner.
I'm in agreement with you here Kelly. A lot of people were speculating with real estate, thus driving up prices for people legitimately just trying to own their first home. They don't deserve a bail-out and they do deserve to get burned.
ReplyDeleteI'm just wondering if there's a better way than only freezing interest rates for homeowners who can prove that the mortgage in question is on their primary residence.
"Uneducated homeowners who live in the property should have an option of receiving some form of government loan which would make the PITI payment affordable to the homeowner."
ReplyDeleteThat would just mean even more negative amortization, as now not only would their mortgage principal be ever growing, but they'd have an additional government loan to boot. And since they can't make the PITI payments already, that government loan would presumably have to be negative amortizing as well.
"I'm just wondering if there's a better way than only freezing interest rates for homeowners who can prove that the mortgage in question is on their primary residence."
Better for whom? It really depends on why it is that the people are having problems. At least half of foreclosures are due to a loss of income, such as due to divorce, death, unemployment. For those people there's really not much you can do - maybe a temporary forbearance if they can be really sure their income will return, but otherwise they're just going to have to live in a much smaller place or maybe stay with family for a while.
Freezing interest rates can be a win-win in certain situations, where a borrower got into a loan with a teaser rate that they never could be expected to pay. The lender should have never given them such a loan, and is going to have to take a loss one way or another. In order for this to work, the borrower be able to make current payments before the reset (no loss of job or other loss of income). That's what the government guidelines call for, and the problem is that this situation is only a small percentage of the loans now in crisis.
In the US, maybe the government, instead of sending out $600 checks to everyone, should spend the money hiring financial advisers to work with homeowners in crisis and negotiate with the banks to come up with a solution geared to their situation. These one-size-fits-all (e.g. interest rate freeze) solutions don't work very well. Or better yet, lay off 100,000 soldiers in Iraq and spend the money improving life here in the US instead of blowing up things abroad.
Unfortunately, at least in Massachusetts, it is routine for a lender that has foreclosed on investment property to immediately evict any current renters, regardless of whether those renters are paying their rent or the amount of such rent. This is a combination of not being prepared to be landlords and thinking that it is easier to sell.
ReplyDeleteTenant protection in foreclosure is probably a matter of state law. Boilerplate rental agreements, widely used by landlords and signed unnegotiated by tenants, are drawn up to favor the landlord/owner to the greatest amount permissible by law.
GRBerry