More Idiocy From the Government - "Lend to Minorities With Bad Credit"

• Con_Alma

  Hmmm. God Bless 'em.
  
  I couldn't imagine being in a position as a homeowner whereby I was rolling the dice. I guess I can understand the banks willingness as long as their debt portfolio was managed in a way that certain percentages were based on dice rolling.
• Manhattan Buckeye

  Well that is why banks fail, their NPAs (non-performing assets) are killing them.
  
  For owners? Well when your asset has fallen by a significant percentage, and according to Shiller could fall another 20% what are you going to do? Keep throwing good money after bad? The real estate collapse is the biggest economic event in most of our lives, and there doesn't appear to be any solution.
• Con_Alma

  Manhattan Buckeye;829995 wrote:Well that is why banks fail, their NPAs (non-performing assets) are killing them.
  
  For owners? Well when your asset has fallen by a significant percentage, and according to Shiller could fall another 20% what are you going to do? Keep throwing good money after bad?...

  Nope. I wouldn't. This is the risk I alluded to. I don't like the idea of injecting risk into my home and shelter needs..
• gut

  Con_Alma;830027 wrote:Nope. I wouldn't. This is the risk I alluded to. I don't like the idea of injecting risk into my home and shelter needs..

  But what risk, ultimately? If you keep making your mortgage payments, then it's nothing but a paper loss. And after 30 years, you own the home and, again, you have a paper loss perhaps until you sell but you are now living rent free.
  
  I don't know if the mortgages are changing, but in many states it was non-recourse and the lenders really couldn't do anything if you walked away. Sure, it will take several years for your credit to recover but it's hardly "financial ruin". You seem to be trying to imply that buying/financing a home carrier potential for catastrophic risk and that's only the case if a person is stupid because in and of itself it's otherwise benign.
• Manhattan Buckeye

  Mortgages are non-recourse, it is a secured asset based on a hard physical structure. The security is the house. Again if Shiller is correct and housing falls another 20% I'm not sure what will happen, but it won't be good.
• gut

  Manhattan Buckeye;830077 wrote:Mortgages are non-recourse, it is a secured asset based on a hard physical structure. The security is the house. Again if Shiller is correct and housing falls another 20% I'm not sure what will happen, but it won't be good.

  
  Obama can put people to work in his own form of TVA project - call it the HOA - tearing down houses to reduce supply and prop-up prices.
  
  But it's a paper loss to the extent of equity because, as you said, of non-recourse. But, yeah, 20% would be hugely painful because people feel poorer and spend less. And to the extent people walk away from their house, it could create a chain reaction spiraling prices downward.
  
  Honestly though, I don't know where rents are nationally, but looking at rents if prices fall further investors are going to dive in because you can get some pretty nice ROI already on some of these foreclosures.
• Con_Alma

  gut;830061 wrote:But what risk, ultimately? If you keep making your mortgage payments, then it's nothing but a paper loss. And after 30 years, you own the home and, again, you have a paper loss perhaps until you sell but you are now living rent free.
  
  ....

  I think that can be answered by the average amount of time people reside in those "investment savings vehicles". If they are not able or planning to live there for 30 plus years they are risking losing money when they sell or walk away from it! That's a risk.
• believer

  

  Manhattan Buckeye;830077 wrote:Mortgages are non-recourse, it is a secured asset based on a hard physical structure. The security is the house. Again if Shiller is correct and housing falls another 20% I'm not sure what will happen, but it won't be good.

  No it won't. The initial mortgage bust already dropped many if not most home values tremendously. There are a lot of people already wrestling with the idea of taking a strategic foreclosure hit simply because they cannot now see the long-term benefit of staying put and hoping the housing market rebounds.
  
  With our Federal government facing its own economic debacle, countries in the European Union facing default, Japan flirting with economic crisis, American companies offshoring for cheaper labor, and Communist China holding the deed I'm not overly optimistic the housing market will bounce back anytime soon.
  
  If we get hit with another 20% loss in home values you can "bet the ranch" that the new American Dream will change rapidly into The Great American Mortgage Nightmare.
• Footwedge

  believer;829949 wrote:True. Every economic decision we enter into bears some risk.
  
  It's my opinion that when people enter into mortgage contracts it is basically no different than a business risk. When an entrepreneur seeks venture capital through borrowing or other financial means, that business stands a very good chance of failing based on many variables...some the fault of the entrepreneur (poor decisions/management, etc.) and some a simple matter of uncontrollable macro-economic reality (disaster, slumping economy, etc.).
  
  When a home owner signs the mortgage contract they assume that their economic situation will remain relatively stable for 30 years and that their home's value will appreciate over the course of the loan.
  
  That worked nicely for several decades after WWII. But with the radical shifting of our economy away from manufacturing to lower paid service based employment coupled with the sub-prime mortgage debacle which clearly deflated home valuation, many people now simple view a mortgage as paying rent to the bank rather than a landlord. If they default, they default. Life goes on.
  
  There is plenty of reckless stupidity to go around including government over and/or under involvement in the housing market, games played by greedy financial institutions to turn quick profits rather than sticking with tried and true lending principles, and shifting moral values on the part of borrowers.

  Hot damn Believer....hammer hits nail squarely on the noggin. Well said bro.
• gut

  Con_Alma;830217 wrote:I think that can be answered by the average amount of time people reside in those "investment savings vehicles". If they are not able or planning to live there for 30 plus years they are risking losing money when they sell or walk away from it! That's a risk.

  
  Like I said, the bubble hardly changes the compelling long-run history of a house where, about every time outside 2003-2008 it's taken 5 years max to break-even. We had a NASDAQ bubble that ultimately destroyed about $5trillion in wealth (about 50-60% of what the housing bubble has cost us to-date) and people didn't stop buying stocks, not even tech stocks. Housing costs have historically tracked inflation so your perspective is taking a rather irrational view of the market condemning sound financial management on the basis that some people are too stupid to avoid overpaying. As I've said multiple times, that is a separate issue and has nothing to do with the overall merits to buying vs. renting, especially given the ratio of prices vs. rents today. There's a 2-5 year period where buying becomes cheaper than renting, and that has NOTHING to do with investing but simply choosing the more affordable "living expense" allocation.
• Con_Alma

  gut;830620 wrote:.... We had a NASDAQ bubble that ultimately destroyed about $5trillion in wealth (about 50-60% of what the housing bubble has cost us to-date) and people didn't stop buying stocks, not even tech stocks. Housing costs have historically tracked inflation so your perspective is taking a rather irrational view of the market condemning sound financial management on the basis that some people are too stupid to avoid overpaying. As I've said multiple times, that is a separate issue and has nothing to do with the overall merits to buying vs. renting, especially given the ratio of prices vs. rents today. There's a 2-5 year period where buying becomes cheaper than renting, and that has NOTHING to do with investing but simply choosing the more affordable "living expense" allocation.

  I have never spoken against owning at all as compared to renting. You are assuming things. I own and have for quite some time.
  
  It's not a rent vs own issue for me. It's a manner of acquiring the home and not looking at it as an investment asset but rather an expense which it is.
• believer

  

  Con_Alma;830649 wrote:It's not a rent vs own issue for me. It's a manner of acquiring the home and not looking at it as an investment asset but rather an expense which it is.

  Yes it is. I'm not surprised that quite a few people in my puny sphere of influence have told me that if they knew what they know now and could go back a few years to restart, they'd definitely rent rather than buy. The headaches, expense, maintenance costs, taxes, hassles of homeowner associations, etc. of owning vs. paying renting hardly makes it worth the - um - "investment."
  
  In my simplistic world a home is simply a place to crash, eat, and shower. Shelter...plain and simple. I can do that in a rental or under a 30 year mortgage. At least with a rental agreement, I'm relatively free to change career paths or at least change shelter locations at my convenience. Under a 30 year mortgage contract...not so much particularly under today's deflated housing market.
  
  Assuming one is fortunate enough to survive a 30 year commitment and own the house outright at the end, you are generally too tired to enjoy it and certainly less energetic about the on-going maintenance. So you sell and end up renting a small unit in a retirement community and then eventually pay rent to a nursing home to await the inevitable.
  
  A pessimistic viewpoint? Perhaps but very few people actually enjoy retirement in the way they had imagined and planned for when they were too busy climbing the corporate ladder or punching a time clock.
  
  Bottom-line: You can't take it with you when you die.
• gut

  Con_Alma;830649 wrote:I have never spoken against owning at all as compared to renting. You are assuming things. I own and have for quite some time.
  
  It's not a rent vs own issue for me. It's a manner of acquiring the home and not looking at it as an investment asset but rather an expense which it is.

  Yes, and renting is an expense, too. I don't understand why you keep insisting that everyone buying a home is buying it for an investment. Like I said, it's a perfectly logical and rational consumption choice (i.e. expense reduction) to buy vs. rent with timeframes well less than 30 years, or even 10-15 years. It's always dependent on the ratio of rent to equivalent mortgage, but between the tax deduction and contribution to equity there is a significant savings vs. rent after just a few years and with timeframes of even just 5 years it's usually more affordable even with modest (say 5-10%) depreciation.
  
  Obviously it doesn't apply when you have bubble conditions, but it's not like it was a hidden bubble no one saw forming. Granted, you may not sell and be forced to walk away from a non-recourse loan and have trouble getting another mortgage for several years. However, these are otherwise paper losses that are not realized until you actually downsize. The person moving might take a hit on their house, but they are getting the same price off an equivalent house they would be moving to. No different than someone who took a $200k gain from a sale in 2005, bought another house for basically the same price, and subsequently lost $200k in value on their new home. Now if that person took the $200k and blew it on cars, vacations and Vegas then that's an issue of financial irresponsibility that has nothing to do with their housing situation.
• Con_Alma

  gut;830922 wrote:Yes, and renting is an expense, too. I don't understand why you keep insisting that everyone buying a home is buying it for an investment. ./...

  I'll reprhase for clarification.
  
  It's not a rent vs own scenario. OWNING IS THE BETTER OPTION!!!!!! I'm not comparing the two because owning is better. You are the one who continues to refer to renting and I'm not really sure why.
  
  What I'm comparing is owning with the intent of the home being shelter and an investment asset vs owning the home as a shelter only.
  
  In addition, I haven't ever insisted that everyone who buys a home is buying it as an investment vehicle. Nowhere have I posted such a thing.
• cruiser_96

  

  Con_Alma: Why do you want us renting!? It would seem to me that owning would be a better option. If you own, and hope/plan to for an extended period of time, you are creating an investment that can (risk assumed) make gains in the long run.
  
  Again, why do you think renting is better?
  
  
• Con_Alma

  cruiser_96;831246 wrote:Con_Alma: Why do you want us renting!? It would seem to me that owning would be a better option. If you own, and hope/plan to for an extended period of time, you are creating an investment that can (risk assumed) make gains in the long run.
  
  Again, why do you think renting is better?
  
  

  Why I outta!!!!!
  
  
  Let's go cruiser. Into the circle and we'll settle this!
• cruiser_96

  

  Can't. I'm winded from typing. Feel the burn...
• Con_Alma

  yeah, I'll need a nose plug before we start. I got up to get something to drink and crossed my feet and smacked the ole nose on the edge of the desk.
• gut

  Con_Alma;831007 wrote: What I'm comparing is owning with the intent of the home being shelter and an investment asset vs owning the home as a shelter only.

  Why do you keep insisting that the two are mutually exclusive? First off, I've never said it's an investment, it's a savings vehicle. Second, the fact it can also be an "investment" asset doesn't preclude the primary purpose of owning it as a shelter. I've never claimed it is an investment, so I don't even know why or what you are arguing.
  
  It may not be the type of "savings" you normally think of, but if you admit owning is generally the cheaper alternative to renting, then very simply owning is a savings vehicle (the money you are savings vs. otherwise rentings). I don't know what is so difficult about that concept.
• Con_Alma

  gut;831807 wrote:Why do you keep insisting that the two are mutually exclusive?

  Because for me they are. I make them that way. I see problems existing for others who combines them. That's my point. I disagree in combining the two.
  

  gut;831807 wrote:...First off, I've never said it's an investment, it's a savings vehicle. ...

  The characteristics of the scenario you have described are more similar to those of an investment if any assumptive appreciation gain is part of the equation as opposed to a savings vehicle. If you would rather I used the term savings I'd be happy to oblige.
  

  gut;831807 wrote:...Second, the fact it can also be an "investment" asset doesn't preclude the primary purpose of owning it as a shelter. ...

  Indeed it can be. I've never stated it can't. My problem is when when people cry they have lost their shelter because their "savings" vehicle has realized fluctuations in the variables that can and do exist and has caused them troubles.
  

  gut;831807 wrote:... I've never claimed it is an investment, so I don't even know why or what you are arguing.......

  My apologies if I've come across as argumentative. That's certainly not my intent. Why I am posting is to offer my view on the topic. What I am posting is that when the home is solely purchased as a shelter and not relied upon as a savings vehicle, the ability to manage it differently or rather the approach in how it's managed, ie. and expense with minimal or no debt assumed, then the number of foreclosures and short sales wouldn't nearly be what they are. As a primary, need shelter is a requirement for everyone. Acquiring it as only as a negative cash flow expense would create a mindset of minimal debt being sought to acquire and would change the landscape of the market and people losing their homes.
  
  
  

  gut;831807 wrote:...It may not be the type of "savings" you normally think of, but if you admit owning is generally the cheaper alternative to renting, then very simply owning is a savings vehicle (the money you are savings vs. otherwise rentings)....

  
  ...or "could be" savings...really not spending in your example. ...more of an opportunity cost difference.
  
  

  gut;831807 wrote:... I don't know what is so difficult about that concept.

  It's not difficult at all. I simply don't agree with the approach that so many take. Is my position that difficult to understand...not necessarily agree with but understand?
• gut

  Con_Alma;831875 wrote: It's not difficult at all. I simply don't agree with the approach that so many take. Is my position that difficult to understand...not necessarily agree with but understand?

  
  I just don't understand what approach you are assuming most people take and why you assume that. With interest rates where they are, it's 100% rational (indeed, prudent) to finance a house because you can generate better returns on your money in the markets. Again, how you structure the purchase is entirely separate and really has nothing to do with the buy/invest perspective, it's simply, again, the lower cost alternative. And if someone locked in a mortgage rate, there's really no risk as they are unaffected by the fluctuation in the underlying value. Even in the bubble conditions, yes, people could theoretically lose a few hundred k if they had to sell, but the new house they buy is also a few hundred k cheaper than it would otherwise be. You actually only truly realize that gain/loss 30-40 years down the road if and when you downsize in retirement. So even with the bubble, I don't see the "risk" you talk about outside of the traditional 2-5 years to recover the selling costs (which, again, that calculation relies on the ratio of rents to equivalent mortgage).
  
  The savings I refer to doesn't require any investment gain. You spend $1k a month on renting and have nothing in 30 years, or you spend $1.5k ($1.0k after-tax) a month on a mortgage to buy the same place and in 30 years you own something that has value. If the value of the house didn't change one bit (i.e. no investment gain), you still have a savings generated on that principle/rent that historically tracks inflation. Why? Because while rents will track inflation, more or less, your mortgage is fixed and so in 2-5 years that difference covers your selling cost and then it becomes a REAL savings vs. renting.
  
  And what got most people in trouble was overextending with imprudent loans I don't think they understood. I would say in most cases, they overextended not because they were thinking about an investment but because they were making a pure consumption/domicile choice and simply wanted digs they couldn't afford. That risk in the financing/structuring of the transaction is really a separate issue, and one that could have been avoided with sound financial management.
• Con_Alma

  gut;831926 wrote:... With interest rates where they are, it's 100% rational (indeed, prudent) to finance a house because you can generate better returns on your money in the markets. ...

  There it is. The objective isn't to free up money so that you can generate returns in the market. This is our fundamental disagreement.
  
  I disagree with leveraging your shelter to free up money for market exposure. Very few average Americans increase their wealth with stock market activity. Most of them maintain inflationary increases at best.
• gut

  Con_Alma;832006 wrote:There it is. The objective isn't to free up money so that you can generate returns in the market. This is our fundamental disagreement.
  
  I disagree with leveraging your shelter to free up money for market exposure. Very few average Americans increase their wealth with stock market activity. Most of them maintain inflationary increases at best.

  OK, so ignore investing it. It just leaves you with more cash for a rainy day. There is absolutely no reason to pay 50-100% cash for a house when those equity gains are yours whether you put 5% down or 50% down. All the issues you mention are due to people overextending, which as I said is a completely separate issue. With rates where they are, after-tax interest of about 3.5% (net is less if you simply put the savings into a risk-free cd, obviously not at today's rates of 0%) is small insurance to pay for the added liquidity for precisely the rainy day you mention. And, like I said, after a few years the savings vs. rent is more than offsetting that interest. My return on equity in my house is @ 3.5% - the reduction of interest. I don't know where you go saying the average American barely keeps pace with inflation in the markets - dollar-cost averaging and forget about it is going to do over 5%.
  
  And that's not even mentioning the option of putting money into your 401k - tax free (until distribution) - as opposed to saving for a house. $1000 a month more into my 401k (or perhaps a Roth, depending on my future expected tax rate) vs. after-tax into my house that will only generate 3.5%?!? Imagine putting that $1000 a month into my 401k, which ignoring the company match, if I'm in a lower tax bracket in retirement I easily beat the 3.5% interest if I did nothing with that 401k money but leave it sit in cash. But reality is put in a S&P index and forget about it over 30 years will crush that 3.5% interest.
  
  Your position is logically inconsistent. The most flexibility and security here, in the long-run (even if you buy/sell several times) is from a mortgage and buying. Yes, people can get into trouble if they don't know what they are doing or overextend, but that doesn't change the obvious merit of a mortgage being prudent financial management.
• Con_Alma

  gut;832225 wrote:.... There is absolutely no reason to pay 50-100% cash for a house when those equity gains are yours whether you put 5% down or 50% down. ... With rates where they are, after-tax interest of about 3.5% (net is less if you simply put the savings into a risk-free cd, obviously not at today's rates of 0%) ... My return on equity in my house is @ 3.5% - the reduction of interest. I don't know where you go saying the average American barely keeps pace with inflation in the markets - dollar-cost averaging and forget about it is going to do over 5%. ...

  The average "investor" in the US doesn't dollar cost average and tends to move on emotion meaning they are doing the opposite of what they should. They buy when things are going well, or high, and sell when the market drops and is down, or sell low. This drastically impacts their average return year after year. There are several available studies available to read regarding these tendencies in the US on-line.
  
  In addition, the return you quoted above is miserable. If I earn only 5% on my money with your dollar cost averaging strategy I can do the same thing with the long term appreciation you have listed that exists in your home. You must include in your analysis the potential increasing real estate taxes associated with that equity appreciation. There's also a "risk" in new levys added to the taxation that are voted on.
  
  
  
  

  gut;832225 wrote:...And that's not even mentioning the option of putting money into your 401k - tax free (until distribution) - as opposed to saving for a house.

  401k's 403bs are not liquid as you have stated above was an advantage in not placing the funds into the home but rather investing them. In addition, with tax rates sure to rise in the future and presently at historic lows you may be better off paying on the lower tax rate now and investing in a ROTH or 401k Roth, if your company makes one available, which gives you full liquidity of principle but does have restrictions on the earnings...if you are eligible for such a vehicle which I am not.
  
  
  I'm glad we are back to referring to investments and the correlation it can have with mortgaging one's home.
  
  The point is people can do both. Pay for a home and invest yet people make a conscious decision not to. I keep my income reasonable as we continue to put money back into our practice for growth. I have no risk associated with my home and have no reason to want it to appreciate. In fact, my home appreciating increases my costs.
  
  Although I can mathematically justify borrowing against my home and using the proceeds to further invest I would be taking a risk in so doing. This risk I would rather not have held against my shelter.
• Con_Alma

  gut;832225 wrote:... There is absolutely no reason to pay 50-100% cash for a house when those equity gains are yours whether you put 5% down or 50% down. ....

  My home doesn't provide equity gains. It's a shelter. To get an equity gain from a home you must sell it. I need it as a shelter. I guess I could take a loan against it to get those "equity gains" but now I have created a liability to someone against my shelter.
  
  It's my house not an investment.