In the fog…

The proverbial American Dream homeownership scenario suggests that a citizen scrimps and saves to achieve their goal… homeownership. In fact, thats the mission statement of Fannie Mae.

The government established Fannie Mae in order to expand the flow of mortgage funds in all communities, at all times, under all economic conditions, and to help lower the costs to buy a home.

But in the wake of damage caused by the overzealousness to fullfill this goal (I am not singling out Fannie Mae) by getting the homeownership rate up to 69% in the past several years, there has been a change in the relationship of housing to its owners.

In other words, the offset to making it so easy to purchase property, is that its a whole lot easier to walk away. Les Christie’s CNN/Money piece called Homeowners: Can’t pay? Just walk away

Current lending practices have created an environment where a measure as extreme as abandoning a home actually makes sense to some people.

Many buyers put little or no money down, so they don’t have much invested in them. That leaves them with little incentive to keep making payments when a home’s market value dips below the balance of the mortgage.

The most serious consequence is a tremendous hit to credit scores. For some, that’s better than throwing away money they’ll never recover by selling their home.

And while a mortgage default can savage a person’s credit record, trying to pay off a loan they can’t afford could be worse for borrowers if it leads to bankruptcy, said Craig Watts, a spokesman for the credit reporting firm Fair Isaac.

The first time buyer’s biggest challenge is not affordability of the monthly payments but accumulation of the down payment. Prior to the recent housing boom, typical mortgage loan to value ratios were 80/20 at a fixed rate. The homeowner literally bought into homeownership because it was a challenge to get that first home. One could infer that many were emotionally vested into the property.

During the mortgage application process, the potential homebuyer worked towards getting that commitment letter from the lender, and then if all went well, the property would close and for the rest of their lives, they would be able to enjoy homeownership.

However for the past several years, the key to homeownership shifted from the downpayment to the monthly payment. Believe, I am not against innovative financial products to improve affordability, but common sense has to be built in. For example, it was inconceivable to me how a borrower could be qualified at a 1% teaser mortgage rate and the rate go to 6% in a year or two even though they barely qualified at 1%. Compound that with declining real estate values and it becomes illogical and bad business practice for a borrower to stick with the property. The new mortgage payment is 6 times higher and the mortgage is higher than the equity of the house as their market continues to decline.

I am not lamenting the loss in the traditional buying process of housing, rather the ramifications of fast and loose credit. I think easy credit changed many American’s views on their relationship to homeownership and in many ways, the mandate for greater homeownership, while successful on paper, has been a failure.

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3 Responses to “Commitment Letter Is No Letter Of Commitment”

  1. Doug says:

    Additionally, by, “help[ing] lower the costs to buy a home”, these GSEs end up driving up the price of the home since demand will rise against a given supply. The same holds true for these innovative financial products like option arms etc. This is exactly what happened the past few years as housing prices rose double digits each year. As a buyer, I’d rather deal with higher interest rates and less innovative financial products along with a lower house price. My property taxes will be lower, and I can always refinance if interest rates drop in the future.

  2. Interesting point… while its true that lower costs such as mortgage rates and real estate taxes cause prices to rise, does that mean that FNMA’s efforts are a zero sum game? Lower costs + higher prices = higher costs + lower prices affordability? In other words, does this suggest that net affordability would be about the same without the secondary mortgage market? While I understand what you are saying, I think there would be less homeownership and the overall costs would be a lot more expensive and unfair depending on the region you live in. For example, mortgages might be nearly impossible to find in North Dakota (no slight intended) but readily available in Florida because of greater population density.

  3. Doug says:

    Maybe I’m not understanding something, but can’t there be a secondary mortgage market without FNMA? If so, why would wall street care if a mortgage is originated in Florida vs. North Dakota? It would also allow them to be more diversified by mixing in regions as loans are sliced and diced.