Mortgage Ranting

Felix1177 · Joined: 29 Apr 2008 Posts: 1

How did we get into this mess? Foreclosure rates are at record highs, no thanks to our society, we are LIVING BEYOND OUR MEANS. Just because someone is approved for a $350,000 mortgage at an ARM at whatever rate doesn't mean that it's the best choice. Many homeowners have bitten off more than they can chew. My rule is if the buyer cannot afford a 15 year mortgage vs a 30 year mortgage, than maybe they should look for something more affordable. I think a 30yr mortgage is way too long, let alone a 40 or 50yr loan. I cannot understand why anyone doesn't ask what the monthly payment difference is between a 15yr vs a 30yr mortgage, many believe it would double their mortgage, WRONG, WRONG, WRONG! When I refinanced from a 30yr to a 15yr, my monthly payment went up $50. I wish I knew better when I was closing on my first home. The savings are through the roof. It's the difference of over a HUNDRED THOUSAND DOLLARS. How do people think the tax deductions on the interest are worth the extra 15 years? Am I out of line? Please explain to me why I am crazy?

m2c · Joined: 03 Aug 2005 Posts: 937

I suppose the first question is whether the “mess” is a media event. Troubles, yes, but did the media hyperbole encourage the “under-educated class” to over leverage and is the same media exacerbating the counter reaction? Note today’s article in the Journal about the growth in delinquency moderating (http://online.wsj.com/article/SB120951348606254561.html?mod=todays_us_money_and_investing) Valuation problems – been there; done that. Remember Texas and some other western states in the 80s? The costly GNMA “resale/refinance” program? Seemed like the end of the world then but wasn’t. Issue is geographically more wide spread now and the overlay of global competition doesn’t help, but “help” be the “government” might make things worse.

This leads me to incentives. Maybe, just maybe, the over-leveraged position was encouraged by rationally following incentives laid out by the good folks in Washington. I’ve never really understood the rationale for tax deductibility of mortgage interest but adding MI was ludicrous. While I dutifully write off the interest amount, I lament that this subsidy does encourage “over consumption” of housing. Ditto for the high LTVs. FHA was one thing but at least at first, it came with cumbersome “controls”;remember those VC items? Then conventional financing hopped on the band wagon! A case of government marching in unison to the tune of “home ownership means stable communities”. 70% home ownership goal! Seems now that high home ownership rates can mean Unstable communities.

All this is overstated but my point is that our current environment may have been caused in part not by under-educated dupes falling for slick pitches but by semi-rational consumers responding to incentives created by our politicians and fanned by the media. True that exponential functions are not inherently intuitive. In the days of “slip sticks” these relationships were a bit more visual for the bulk of the population but now we have $20 hand calculators. Certainly some of these “dupes” could have placed aside their greed and punched some buttons. Well, technology taketh and technology giveth. Pople still have to ask the question … or face the results of their inaction. PS - a bit of that shows up in your undiscounted figure of $100K