Craming down yet another housing price post...

When I came back from Christmas vacation, I had a stack of mail waiting for me. Mixed in with the Pennysaver and checks from mail-in rebates was a letter from the state of Maryland. It was a reassessment notice - evidently the state of Maryland reassesses the market value of property that it uses for tax purposes every 3 years. What was surprising is that my assessment went down - by $11,320.

I'm not really sure how to feel about this. It's certainly proof that housing prices are going down. It also makes it seem like one of my financial goals - paying off enough of my mortgage to drop PMI - is unlikely to occur any time soon, because if the bank reappraises my house it would require a far larger payment than I have cash on hand. On the plus side, this means that I'll pay less in property taxes - which is nice since I got hit by an increase last year based on what I bought the house for - which sharply increased my mortgage payments, since I had to pay this years taxes plus make up for last year's in escrow.

And on a marginally related note, the government is making it even easier for deadbeats who overextended themselves to stay in their homes. The Senate has convinced Citibank to accept cramdowns - principal and interest reductions on mortgages - for people in bankruptcy, and it's likely that other banks will do the same. There is a lengthy discussion on Fatwallet Finance about this.

Some people have argued that this isn't so bad - it prevents the houses from going into foreclosure, which could lead to higher losses by banks, and it could keep housing prices from falling due to those foreclosures.

My thought is that I'd rather deal with lower property values than reward people who often acted irresponsibly - lied on mortgage applications, bought more house than they can afford. Why should someone who overextended themselves end up with a nicer house than me that they paid less for, someone with a bankruptcy end up with better mortgage terms than my 803 credit score got me? Maybe this is cutting off my nose to spite my face, but the recent responses to the "financial crisis" seem to be to reward people who acted irresponsibly, paid for by those who scrimped and saved and worked overtime. Any illusions I had about the fairness of life are gone.

There are legitimate reasons to question the cramdowns, even if you accept the argument that foreclosures would be worse. Changing the incentives definitely creates a moral hazard - it rewards bad behavior. It distorts incentives. If you want to buy a house but aren't sure if you will be able to afford it, the idea that you will get a discount if you end up in bankruptcy makes buying too much house more attractive. It also makes filing for bankruptcy more attractive. Both of those mean that more costs will be passed on to consumers in future loans. It also means that interest rates will be higher to compensate for it - and higher interest rates tend to mean lower housing prices, which might eat up any of the advantages of keeping those foreclosures off the market.

When housing prices started falling, I regretted buying the house that I bought - I worked hard and saved for years to buy a house, only to see it drop sharply in value. My initial reaction was that I should have waited to buy a house. Now I'm starting to think that I erred in buying my house - I bought too small of a house. I should have figured out the most I could convince someone to loan me and bought a house at that price, with a teaser interest rate, negative amortization ARM. I could have then lived in the house for a couple years, than declared bankruptcy and gotten a nice discount and a low-interest mortgage.