Wednesday, March 05, 2008

Mortgage insanity

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.