Tuesday, December 16, 2008

Who is the victim in sub-prime mortgage failures?

The media repeatedly portrays homeowners unable to make their mortgage payments as victims of the unscrupulous sub-prime mortgage lenders. Wait a minute. Who is the victim here? It is certainly a tragedy that a family, living in a house for years, through job loss or medical crisis, can no longer make mortgage payments and loses their home. It is entirely a different story when someone purchases an expensive home or condo for no money down (or worse, cash back) and then fails to make even one mortgage payment. How is this person who fails to make payments on a home that they cannot possibly afford, considered a victim?

Originally, media reports, (See this story on National Public Radio, for example) characterized the borrowers as people who refinanced or purchased adjustable rate mortgages, without realizing the risk that interest rates would go up. Many of these people had lived in their homes for years. However, it now turns out that the victim examples have taken a change, (See Business Week, FHA-Backed Loans: The New Subprime). The media admits that borrowers now include those, like an unemployed student, living on an educational grant from the Cayman Islands, who purchased a $318,000 home with a $2,600 a month payment. The grant was for one year and she had no prospects of paying the mortgage. In another example, the purchasers, a husband and wife, together made $52,000 and purchased a $316,375 home with payments equalling 58% of their gross income. They got thousands of dollars in a cash back arrangement. Are we to consider these people to be victims? I hardly think so. As the Business Week story claims, if true, these loans are still being made by lenders whose default rate is as high as 9.2% of their outstanding loans. Because of the so-called cash incentives, buyers are defaulting before even on payment is made.

We used to say that it took two to tango, well, it takes buyers who are dishonest enough to take out a mortgage that they have no possible intention of paying, to make the crisis as bad as it is today. I recently did a survey of local real estate conditions. What I found was interesting but not surprising. In many new home neighborhoods, mostly in prestigious locations, I found a very high percentage of short sale and foreclosure homes, sometimes as many as five or six on the same street and block. However, in more stable neighborhoods, where families had purchased the homes over the past few years, I could find very few, if any, distressed properties. It is apparent that much of problem stems from people attempting to take advantage of the system and move into homes that they cannot realistically afford. Just because we have a mortgage system that allows them to do this, does not excuse individual responsibility.

Let's not consider all of those losing their homes in this subprime crisis to be victims, some of the buyers had no reasonable expectation of maintaining their purchases and took advantage of a system that doesn't work to get some free housing. We need to get back to basic honesty and integrity before the housing crisis will abate.

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