mad anthony

Rants, politics, and thoughts on politics, technology, life,
and stuff from a generally politically conservative Baltimoron.

Monday, March 19, 2007

This post's interest rate will reset to higher one it two years...

Somone, possibly Megan McCardle, at the Economist's Free Exchange blog, is pondering who the typical subprime borrower is - someone who generally has good credit but couldn't get a loan for rising housing prices without an unconventional loand, or someone with generally bad credit who probably couldn't normally finance a piece of bubble gum with 25% down (a reference to the documentary Slasher). Meanwhile, Brad DeLong thinks that it's a failure of the lenders, not just the borrowers, to the point that a federal bailout is in order.

Now, MadAnthony is pretty much as free-market capitalist as they come, to the point of defending Ford for it's Pinto gas tank decision and arguing that human organ sales should be legal. But I've also bought a home in the past year, and can't help but think that mortgage brokers and companies have some share of the blame.

When I was shopping for a loan, I was offered mortgages with payments that would have been impossible for me to make and still buy food - with payents that would have made up about 70% of my take-home pay. I had a mortgage broker tell me to transfer funds out of my savings account and hide them so I would qualify for downpayment assistance. I had a major provider approve me for a no-doc loan without requesting it because of my "good credit" - they didn't call it a no-doc loan, they had some sort of marketing-speak for it, but the bottom line is that they would have loaned me close to a quarter million based entirely on the fact that I've paid my Amex bill and the loan on a 2002 Chrysler.

And the government isn't entirely blameless either (I always find a way to blame them for something). When I bought Casa De Mad, I took advantage of Maryland's More Home 4 Less program, which uses federal CDA (Community Development Association) funds. In addition to a lower interest rate, and various options including IO's (Interest Only for the first 5 years), 40 year terms, and and ARM's (Adjustable Rate Mortgage), the program offers a $5000 no-interest loan towards closing costs. Which I did not qualify for, because I had enough money in my savings account to cover closing costs.

Which is retarded. I easily could have made a bunch of purchases and spent that money, but instead I saved it, and I was punished for my responsibility. More importantly, it's suicide to buy a house without having something saved up in case of an emergency - either something breaking in the house and requiring expensive repairs (like, I don't know, an air conditioner that hemorages water), or to cover mortgage payments in case of a job loss. But the government has set up a program that discourages homebuyers from having savings, thus encouraging people to be stuck if they end up needing savings.

What was interesting is I was evidently one of the first people to have this problem. When buying a home in Baltimore County, one has to go to one-on-one counseling which includes a financial review of pretty much every financial document you've ever had - tax forms, pay stubs, bills, ect. When I found out that I wouldn't get the loan, I called the nonprofit that did my councinling, and they had never run into this before - suggesting that most people who use the program have no savings. And during the conseling session, the woman who ran the program pretty much looked at my financials and said she didn't really have anything to say. While I'm not exactly a scofflaw, I'm not exactly loaded either, so that suggests that the average first-time homebuyer is really stretching things. They made a big deal that you had to put at least 1% down to use the more house 4 less program, which also suggests that many first time or marginal borrowers aren't the best at financial planning, or at least don't have the most stable income sources.

I think that there is some truth to the fact that homebuyers felt that they had to stretch to buy a house, or had to jump into the market before they were priced out. I first started looking at home prices and the like around '04, and prices pretty much doubled between then and when I actually bought. While I would have liked to have made a larger down payment, and while I had to give up some of the things I would have liked in a house (garage, lawn, not being attached to other houses), I also felt that I needed to jump in when I did or I would never afford a house - so I bought right before the market started sliding. (Of course, I also had to work around my lease and my job).

I do question the wisdom of many of the loans people took out. I tend to be risk averse, so an ARM or IO or anything where my payment might go up was not something I wanted to do. I also don't have any big plans to switch jobs, so I wasn't going to bank on having a higher income in a few years. It's one thing to hope that your house increases in value, it's another thing to depend on it in a few years to make payments. Some of the alternative loans that were sold were designed for a very small subset of people - less than IO mortgages were often designed for people who get most of their compensation in one lump sum, like salespeople with large commissions - they could make small payments during the year and then a big payment when they got their year-end or quarter-end bonus. But those loans were sold to people not in those catagories, and lots of that blame for that falls on the mortgage industry.

So what to do? Well, here I'm torn between my libertarian small government beliefs and my own self-interest. Even though I have a fixed rate (although 40-year) mortgage, it's in my best interest that there is a soft landing to the subprime mess. I don't want prices to go down a bunch, which is what will happen if foreclosures increase and banks start auctioning off houses at rock-bottom prices. And the fact that less subprime loans are being written is bad when it comes time to sell a house- if fewer people can get financed, fewer people can buy, and prices go down - good old supply and demand. So even if I would never use a 50-year stated interest ARM, their availability makes my house worth more.

I tend to be against government bailouts. I do think (as much as it pains me to say this) that Hillary Clinton has an intersting point in the quote in Brad DeLong's post - that prepayment penalties exist heavily in the subprime market and don't in the rest of the mortgage world. While I'm generally for courts enforcing contracts, getting rid of them is a less painful alternative to a bailout. I can't understand why anyone in their right minds would sign a mortgage with a prepayment penalty, especially given that the average person is only in a house for something like 5-10 years. And it beats massive forclosures.

I do think, though, that most banks would rather refinance a loan than foreclose. Let's face it, banks lose money on foreclosure. They don't want to have to do it, they want to own money, not houses. The kind of houses that get forclosed are often the kind that have "deferred maintainance issues". They are obviously worth way less than what's owned, or the person would sell the house (which is why foreclosure rates were so low during the housing boom despite the high prices - people had better alternatives to foreclosure)- which means the bank would be losing money. Refinancing - which keeps home values up, keeps banks out of the real estate business, and keeps subprime lenders from being kicked to the curb - seems like a win-win for everyone. Including me.


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