Monday, March 2, 2009

Encouraging Homeownership - The Policy That Led to the Crisis

The Indianapolis Star editorializes this morning about the fact that part of the housing and financial crisis is due to the borrowers being encouraged to buy homes that they could ill afford:
Homes were sold for little or no down payment to eager families without substantial reserves, who could afford initial payments but often floundered when adjustable rate mortgages hit higher gears and property taxes, initially set for empty land, ballooned from the construction. The builders and lenders who profited from this easy-credit scenario often were protected by federal insurance; not so the would-be homeowners. And foreclosed, vacated homes pulled down values in their neighborhoods, urban and suburban.
It is obvious that the underwriting standards that allowed these borderline mortgages to be closed need to be tightened. Part of the problem though is that federal government policies encouraged renters to buy homes when their incomes did not justify homeownership.

The Star also picks up on something that is often missed during this debate. When it comes to new homes, the borrower has often been qualified to buy homes using property taxes figured on undeveloped land. When the property taxes on the developed property hits about two years later, many homeowners have not been saving to pay the large tax bill that arrives from their lender. Quite often they were not warned about this by their mortgage broker or lender.

Mortgage lenders need to tighten underwriting standards and government needs to stop encouraging people to be homeowners who shouldn't be. There is nothing wrong with someone with little or unstable income being a renter.


Doug said...

On their own, I'm not sure these risky mortgages would have been able to hurt us as badly as they are. The real force amplifier here seems to have been the ability to "insure" the bundled mortgage securities to convert them from their natural level of risk to AAA rated financial instruments. That created the appearance of wealth where none really existed and added fuel to the mortgage fire that's now burning out of control.

timb said...

Doug is right. My wife and I bought our home with no money down and pretty nasty credit. Rather than raise our kids in terrible apartment, we now have a modest Speedway home to raise them in. Without the government policies for mortgage insurance and urging lenders to create opportunities for renters, many people would be out of a home.

Did some of those people buy "too much house"? Undoubtedly, but foreclosing on a 125,000 in Speedway doesn't bring down an international banking system. It's only when that $125000 is combined and leveraged to 30 times its value (and rated Triple A!!) that it became dangerous.

In other words, don't blame us, Paul, and don't tell us we should have rented cake.

Paul K. Ogden said...

Tim, unfortunately I think you're the exception to the rule. For every one of you, there is at least one person for whom the programs encouraging home ownership haven't helped. The cumulative of those bad mortgages led us to our current problems. I think there is a middle ground there somewhere.

I can't believe a Democrat like you is even allowed to live in Republican Speedway.