This misses the fact that, like any leveraged borrower, the homeowner has already taken substantial losses. Homeowners are no different from any other leveraged borrower. Is Cerberus on the hook for all of Chrysler's losses? Are bank shareholders liable for unlimited capital calls in the event their company loses lots of money? No. Most secured loans are non-recourse, and banks understand full well the concept of a non-recourse secured loan: if the value of the security falls below the value of the loan, they're liable to lose money.
Now legally, it's true, many US mortgages have recourse to the borrower. But it's equally true that in the real world, the overwhelming majority of mortgages are de facto non-recourse.
I am certainly not arguing that we should make home loans recourse loans. And neither is anyone else, as far as I know, proposing to take large amounts of extra money from the homeowners and transfer it to the lenders in order to make up for the fact that their collateral isn't worth what it once was; when people did make such a proposal, during the 2005 bankruptcy reform, I was against it. The only proposal in that direction is that the homeowners should have to keep paying what they agreed to pay, or else lose the house.
On the other hand, there is a proposal on the table to make the homeowners partially whole on their losses by writing down their mortgage interest rates, at the expense of the banks who lent them money. In the context of that argument, a number of people seem to be making the argument that the homeowners really deserve a large transfer from the banks, because it was the fault of the banks that they lent them money in the first place.
I think both the lenders and the borrowers were acting like idiots. I don't think that either of them "deserve" to lose money, in the sense that I would actually like to see them do so; I think it would be much nicer if homeowners and bankers were both prosperous. I think that there need to be substantial costs to both sides to a foreclosure to prevent either side from abusing the system, and I think we've actually got a pretty good balance: banks lose money obtaining and selling the collateral, and borrowers lose any downpayment and get a big ding on their credit report.
I think that during the asset bubble, these potential penalties lost their sting, and that leaves us in the unhappy situation of today. That's why I think something like a system where homeowners hand over the deed in exchange for taking no hit on their credit report or their tax bill is a good idea because it doesn't reward borrowers for irresponsibility, or penalize them unduly for buying during a bubble. But I don't say this because I think either of them deserves it; I simply think we'll all be better off if we let everyone escape with as little damage as possible, but no incentive to be stupid again.
A side quibble: as far as I can tell, most borrowers who bought with little money down haven't taken any real losses. They may take losses in the future, if they make all their payments and prices never recover. But most of the really troubled homeowners haven't paid enough money towards equity to claim they've lost anything except a little time.
Felix also says that the mortgage interest tax deduction doesn't matter to most people:
The standard deduction in 2009 for a married couple filing jointly is $11,400. That means you get to subtract $11,400 from your income even if you don't pay any mortgage interest at all. Now suppose that married couple bought a home for $200,000, put 20% down, and got a 6% mortgage. Then their annual interest payments are 6% of $180,000, or $10,800. They own your own home, but they get no benefit from the tax deduction: they're still better off taking the standard deduction.
Of course, if you own a home in Washington DC or in New York, you're likely to have a mortgage of much more than $180,000. But let's say that our married couple bought a $350,000 house instead, and have annual mortgage interest payments of $16,800. Then their taxable income will be reduced by $5,400 as a result of the mortgage-interest tax deduction, which means that their taxes will be reduced by about $1,900, or about $150 a month -- compared to $1,400 in mortgage interest payments. By contrast, refinancing from a 6% mortgage into a 4.5% mortgage will save them $350 in mortgage interest payments: movements in interest rates are much more important to homeowners than tax laws are.
It's true that the mortgage interest tax deduction doesn't really matter at the low end of the market, but this is as much because buyers there don't pay much in the way of income tax as it is due to the standard deduction. But towards the middle of the range, things change because of course, the mortgage interest tax deduction is not the only potential deduction against income. There are also things like state income taxes, childcare expenses and the dependant deduction.
To flip Felix's formula around, this doesn't matter so much in pricey areas like DC and New York, because so few people can afford more than one or two children. But add in state taxes and three or four children, especially if one or two are under the age of six, and the mortgage interest tax deduction starts to really matter in the house price again. Perhaps not as much as changes in interest rates, but I don't think I claimed that the mortgage interest deduction did matter more than interest rates, and indeed, it seems mathematically impossible that it would. But again, we aren't comparing the mortgage interest rate deduction to government controls on interest rates; we're comparing it to no deduction.
Felix's calculations fail to take into account the fact that many people could already itemize for a substantial portion of the standard deduction, but not quite all of it. The mortgage tax deduction makes all their other deductions valuable, too, even if neither one by itself is as large as the standard deduction.
I have to agree with you here. My wife and I's interest payments are less than the example, but with state income taxes and property taxes we still are better off itemizing. Not a big difference, to be sure.
As a clarification, I argued that banks should know better than individuals as to what individuals can afford, not that individuals have no responsibility nor was I arguing that the individual deserves a break.
But I do have a question on ARM loans which you allude to in your post. Does it cost a lot of real money to refinance loans within the assets of the bank? As a hypothetical: Chase has my loan and it's an ARM and it's going to reset at a higher rate. Does it cost Chase money to say, just keep the teaser rate? It seems it would be a lot cheaper to do that than to have them reset it and have the individual get foreclosed on. Why can't Chase just sort out the mortgages by ARM and enter into their computers that the mortgage rate is now "permanent" in an effort to keep me in my house and not foreclosed? Sure they won't make as much of a profit on some loans as others, but the point is to win/win-not as much versus lose/lose-even-more. Do they lose money those first few years of an ARM? I wouldn't think so. I don't know much about the mortgage industry (but I'm pretty sure banks should be smarter than the Average Joe).
Confused,
It may make sense for the bank to refinance your loan. It wouldn't hurt to ask. They probably won't be too interested though until you start missing payments.
Megan,
BB&T CEO John Allison in his talk on the causes of the financial crisis (a very credible talk by a very credible industry expert: http://www.aynrand.org/site/PageServer?pagename=reg_ls_financial_crisis ) suggests a 10% tax credit on purchase of homes in the near term to help the market clear and real estate values to correct. It's a very nice idea and better than what I've seen from the Obama plan.
Thoughts?
Slide 33 in the deck.
oops forgot. Minute 66:00 in the video.
A side quibble: as far as I can tell, most borrowers who bought with little money down haven't taken any real losses.
This isn't just a quibble, it's the central reason why we shouldn't be thinking of these "owners" as victims who need a bailout.
Felix forgot the all important property tax deduction that works in tandem with the mortgage interest deduction. That might screw his scenario up just a bit.
The financial system approved of all this bundling, slicing, and dicing mortgages into weird instruments. Why shouldn't the people involved in the financial system take the hit for the collapse of the house of cards? Maybe, just maybe, next time stockholders and bondholders will be more skeptical about the wisdom of using unorthodox strategies to produce slightly more income.
Let the TARP/Bad Bank buy the mortgage instruments from the banks; 50 cents on the dollar sounds extremely generous these days. Then, refi all the mortgages by knocking the principle down 40%; homeowners will have more to spend immediately and the TARP/Bad Bank makes out on the difference between purchase price and marked down asset values. The hurt goes to the smartest guys/gals in the room and the people who hired them or loaned them money. What's not to like?
"suggests a 10% tax credit on purchase of homes in the near term to help the market clear and real estate values to correct. "
That would only work if the tax credit goes to anyone who buys the houses and not just homeowners. There's no way to politically sell the subsidization of landlords, so it won't happen.
There are too many houses on the market and the houses are too big. Short of burning them down (which would destroy the insurance companies), there is no way to fix the problem that doesn't take more time than we have.
We can't get our fiscal house in order before the retiring boomers mess it up again. We are doomed.
"Are bank shareholders liable for unlimited capital calls in the event their company loses lots of money? No."
This guy proves he doesn't really know what he is talking about. Shareholders aren't on the line for future loses, they are only on the line for loosing up to everything they invested in.
If you buy X amount of stock on margin and the price tumbles, you will have to pay what you committed to.
If you buy X amount of house on a mortgage, and the price tumbles you will still have to pay what you committed to.
And when you are a shareholder you have limited rights with the company (pretty much 0 rights for most of us). When you buy a house with a mortgage you have virtually unlimited rights to the house. Add on a room, gut the carpets, renovate the bathroom, paint it neon pink (as long as there is no HOA).
Try showing up with a paint brush to repaint you local BoA because you are a shareholder
Would you be ok with signing a mortgage and then having the bank decide it wants to move you out and move in a more profitable renter? You better be according to his shareholder analogy.
The simple fact is shareholders are on the line to loose EVERYTHING they invested, and most of them have lost pretty much everything. Mortgage owners are the same.
Buying a house is less risky than buying a bank share, and you get more benefits from the house.
from cnn.com:
According to a report released Wednesday, the real estate market bust and stock market declines have carved a huge chunk out of the assets of baby boomers, the largest age cohort in U.S. history.
So much home equity has been lost that should boomers need to sell their homes, 30% of those aged 45 to 54 would owe money at closing, according to "The Wealth of the Baby Boom Cohorts After the Collapse of the Housing Bubble," a report released by the Center for Economic and Policy Research, a Washington, D.C.-based, non-partisan think tank. About 18% of boomers aged 55 to 64 are underwater and would have to bring money to the table.
The CEPR also found that people who were renting homes in 2004 will have more wealth in 2009 than those who were owners. That's true for all five wealth groups the study analyzed, from the poorest to the wealthiest.
****
We are fukt.
"On the other hand, there is a proposal on the table to make the homeowners partially whole on their losses by writing down their mortgage interest rates, at the expense of the banks who lent them money."
This would have been a great place to segue into a discussion of a certain fund manager/economist's proposal for awarding lenders and other owners of mortgage loans Property Appreciation Rights equivalent to the amount of principal written down.
"Now suppose that married couple bought a home for $200,000, put 20% down, and got a 6% mortgage. Then their annual interest payments are 6% of $180,000, or $10,800. They own your own home, but they get no benefit from the tax deduction: they're still better off taking the standard deduction."
Even at the low end, Felix's argument is specious. First, there are plenty of single people who own $200k homes for whom that mortgage interest deduction would be about double their standard deduction. Second, Even if a couple only has $10,800 in annual mortgage interest, that doesn't mean they're better off with the standard deduction -- because they may have other tax deductions, the combined amount of which exceeds the standard deduction.
The standard deduction has always annoyed me. It's a gift to those with some lifestyles (including mine, at present) but it's punishment for those with other lifestyles that generate substantial deductions that can be itemized.
Enlighten me on something: how much does the mortgage interest deduction (whether "itemised" or not) improve a family's cash-flow as compared with renting a comparable residence?
Presumably significantly more that the figures given here, as mortgage payments tend to be less than rents in the same period.
Bearded Spock,
What do you mean, "we"?
I have a tiny amount of Citigroup stock (they seemed good on paper a few years ago). As far as the blame game goes, I am *much* angrier at the company and its managers for poor lending/investing standards than I am the small time speculators who were rationally taking advantage of what the banks were offering.
Megan Says: I am certainly not arguing that we should make home loans recourse loans.
I'm confused? I thought home loans are recourse loans. If you don't pay up, the bank can sue you for the balance you owe, independent of the home's value. For financial reasons, they may choose not to in most cases, but they can come after your other assets, especially if they think you're good for it.
I know this, because in the 80s I sold a condo for $10k less than I owed on it. It hurt like hell to WRITE a check at the closing. But then again, I kept up my credit and met my obligation.
ok, I did more googling on non-recourse mortgages.
It looks like recourse vs. non-recourse is a function of state law. Also, it looks like second mortgages/equity loans are recourse loans in most places.
It does seem that if you negotiate a short-sale (or a walkaway) with the bank, you may be able to get them to drop their recourse rights. I'm sure this is decided on a cost-benefit basis by the lender, and if you have significant assets they would probably play hardball.
Most states are non-recourse states. Moreover, practically, it rarely pays to sue. If the homeowner had tens or hundreds of thousands of dollars sitting around, they wouldn't have lost the house.
MM, how about calling a few large banks or mortgage lenders in your reporter capacity and ask them how much pricing differs between recourse and nonrecourse states?
I hear you, Nelson. I'm down 95% on a bank stock I still hold. I think I'll recommend that on new mortgages they write that the risk be spread by requiring the mortage taker to share any eventual profits with the bank! I'm sure those calling for more regulation will be more than happy to oblige as will all those who are underwater and happy with the taxpayers (any one but themselves) picking up the losses.
JimR has hit something important: the plethora of state law functioning on top of federal law.
In finance, in food, in tax code, in construction, in just about everything, laws vary by state. And some laws get changed without actual change to the law by a change to implementation rule.
An example: about five years ago, I opened a coffee shop; key to this story is that we planned to serve lunches and baked goods; no fried foods. According to state law as published, we did not need to have a fire-suppressing range hood. But there had recently been a horrible nightclub fire in Rhode Island, and somebody in my state decided to apply a different standard, the National Fire Association Standards, for Fire Marshall inspection. This was a change in the rule, not the law, no public dialog on it; it wasn't yet published in any state rule book or website. But it meant that one week before I was supposed to open, I had to scramble to find someone to build and install this expensive piece of equipment; no warning, and no exceptions.
I was lucky, I had the money to pay for the hood. I found someone who'd built one, and had the target owner back out, so I got it within my target time frame. But this kind of monkeying around with rules, under the radar of law which already varies from state to state, makes doing business, particularly small business hard. When it comes to homeowners and mortgages and policy, even having a discussion that's logical is difficult because we're all talking about our state's rules, not a blanket reality.
Again, I tell this story not to change the subject from home mortgages, but to point out that laws vary by state significantly, and that laws are subject to change without a vote by the legislative body.
Finally, from the years I spent writing about business, I would say that the most difficult part of making investment decisions stems from the probability that regulation will change. I suspect that many large corporations pick states for major new investments where there has been an environment of regulatory stability; not necessarily little or lenient regulation, but stable regulation. I have no proof for this, however.
Megan says: Most states are non-recourse states. Moreover, practically, it rarely pays to sue. If the homeowner had tens or hundreds of thousands of dollars sitting around, they wouldn't have lost the house.
Hmmm, I've learned a lot in this post. Yet another government subsidy encouraging moral hazard.
IMO, I think you're underestimating the impact of non-recourse laws on peoples' decision-making. My guess is that there are lots of underwater homeowners who are current on payments, but will walkaway if the consequences aren't that bad. If you were underwater $100k-$200k or more, what would you do? For $10k, I paid the bill, for $200k, I'd probably walk away if I could.
Now think of the impact on the market from all those people deciding to exercise the housing "put" option that the government has so generously provided them.
The dependent exemption, child tax credit, and childcare deductions are available whether you take the standard deduction or itemize, and are done on 1040, not Schedule A. All it takes to see this is a 1040. So property tax deduction & charitable giving deductions may play a role together with home mortgage interest in the standard vs. itemized debate, but the number of children doesn't really matter--unless you have a real brood and bought a house because 4+-bedroom apartments are really quite rare.
Now think of the impact on the market from all those people deciding to exercise the housing "put" option that the government has so generously provided them.
It's in the contract which was agreed to by both sides. And otherwise, not having the money to pay the settlement in the lawsuit has nothing to do with laws. A law saying the owner who can't afford one mortgage payment must pay off the entire loan has about as much effect as a law forbidding the tide from coming in.
Spock - on the other hand, I just may be able to buy a decent house from a distressed boomer. Maybe I could trade him my over-priced Condo plus some cash?
Nelson says: A law saying the owner who can't afford one mortgage payment must pay off the entire loan has about as much effect as a law forbidding the tide from coming in.
I think you're missing my point. People who can't pay are already protected by bankruptcy law, so this isn't about them. I'm talking about people with a solid income stream (and maybe some assets) deciding to walk away because the rules made it financially advantageous to do so.
Also, while it's true that both sides agreed to the contract, the contract was coerced by the laws. Lenders have probably priced in the housing "put" into the cost of the loan, making everyone's rates higher. (although I bet they severely under-priced the put - but that's their problem). Anyhow, this isn't about whether it's "fair" to lenders.
My greater point, which I think is irrefutable is that right now there's probably more pressure on the housing market as a result of government non-recourse laws. One more case of government meddling in markets making us worse off because of unforeseen consequences.
Nelson: You said "A law saying the owner who can't afford one mortgage payment must pay off the entire loan has about as much effect as a law forbidding the tide from coming in."
A mortgage is not a "loan" A mortgage only secures the "note", the actual "loan". The norm for foreclosure has been one of 2 things. In many cases the bank forgave any extra balance and the amount forgiven was treated as taxable income by the feds. This was changed last year, making the forgiven amount non taxable.
The other way that any shortfall between between the amount that the bank got in a foreclosure auction, or REO sale, and the amount due would be charged back to the borrower. If the borrower would not, or could not, pay the remainder, the bank could GARNISH WAGES and attach other assets of the borrower according to the terms that would be have been spelled out in the note.
The second thing might sound a bit draconian but it serves to keep borrowers on the straight and narrow. Not only do they lose the house, but they're on the hook, possibly forever, for what they borrowed and it can come right out of their pay check. Suddenly that $800,000 home is not as enticing as the $300,000 one. More importantly, a homeowner might think twice before re-mortgaging, or second mortgaging, the house to buy a shiny new Mercedes or a 40 ft. boat.
It would probably be interesting to see what the foreclosure rate is in states that have outlawed recourse mortgages compared to those that have not.
By the way, commercial mortgage loans almost always include a "personal guarantee" from the borrower in the note. That is done because real estate investors would walk away all over the place if they were not personally on the hook.
In Canada, all mortgages are recourse, there is no mortgage interest deduction, and there is no such thing as interest only or negative amortization home mortgages. You can get a 5 year fixed home mortgage here for 4.8% right now, and a 10 year fixed for 5.95%.
Home ownership rates are 68.4% (as compared to 68% in the US).
Home prices are down a bit here, but nothing like the meltdown in the US.
Wow, that's news to me that home loans are "defacto" nonrecourse.
But I guess I'm just a normal person that assumes you have to repay money you borrowed or declare bankruptcy.
Felix is just advancing the old tired idea that there is a free lunch.
Let's revise to make the law more clear--they are either recourse or they are non-recourse. None of this defacto nonsense.
Otherwise it just rewards the low-lifes and penalizes the few stand-up people remaining.
I'm talking about people with a solid income stream (and maybe some assets) deciding to walk away because the rules made it financially advantageous to do so.
There aren't many of these people. You're attempting to turn the exception into a rule.
there's probably more pressure on the housing market as a result of government non-recourse laws
You're grossly exaggerating your moral hazard argument for effect.
Most borrowers don't take the money with the expectation that they will default. Many defaults arise when buyers, optimistic Americans they are, wrongly assumed that their circumstances would change to adapt to a future change in loan terms, i.e. the loan could be refi'd before the next rate adjustment, the incomes needed to service the loan would rise, etc.
As it turns out, these things actually did transpire for many...but not for all, and certainly not during a cyclical downturn. They lowballed the risks, were overly optimistic, and now are paying for it.
Changing recourse provisions will do nothing, since most borrowers don't enter the transaction with the expectation of those terms ever becoming relevant to them -- they aren't expecting to default. The cost of failure is high enough already to create whatever deterrent effect is necessary for most of the population.
The system encourages some risktaking by design. It is better to have some risk and some defaults than no risk and no defaults. The latter may produce a lower failure rate, but the degree of success is also curtailed. There needs to be a balance, rather than an effort to have a zero default rate.
Ultimately, it comes down to better underwriting standards that don't rely on bogus hedges or an expectation of soaring collateral values. Those are easy to evaluate, easy to enforce, and can be based upon fairly straightforward finance principles that are intrinsic to the field and used to be normal. Lenders already knew what those standards are, but they didn't feel the need to use them when values were rising and securities could be easily packaged. If you are on the prowl for moral hazard, you'll find plenty of it there.
RW says: You're grossly exaggerating your moral hazard argument for effect.
Ok. I'll concede the moral hazard argument. That was me just ranting.
But if you were sitting on a house that was $200k underwater and could still make the payments, what would you do? How much underwater would you need to be to decide to pull the rip-cord?
Maybe I don't understand human nature, but I've gotta believe the ability to easily get out from under a $200k loss affects behavior and will result in more walk aways. That will further depress prices.
BTW, I'm not claiming this is somehow a primary cause of the crisis or anything, and I agree with you about other places to look to ring moral hazard out of the system. But this is yet another force pushing in the wrong direction, and I don't see recourse loans as all that punitive when considered together with current bankruptcy laws.
RW: you said "Changing recourse provisions will do nothing, since most borrowers don't enter the transaction with the expectation of those terms ever becoming relevant to them -- they aren't expecting to default."
From what I've read, this last go round of real estate silliness actually involves A LOT of people who decided to become investors. I recently read that a large percentage of defaulted homes are not actually owner occupied - a far higher percentage than I had thought. Technically, such mortgagors are crooks. Standard residential mortgages apply to OWNER OCCUPIED houses only. Other than that, it's supposed to be a COMMERCIAL mortgage - taken solely for profit motives - with none of the restrictions that states place on consumer loans. If you took out a mortgage for business purposes - such as renting the property for a year and then flipping it - but declared you were going to live in the house - you defrauded the bank.
There was another group that bought houses and never made a single payment. This had to be intentional. There was actually a court case (covered in the newspapers here) in my area where a guy had done exactly that and then tried to declare bankruptcy. He lost on the basis that he had entered into the mortgage in bad faith - never intending to repay it.
My guess is that you will NOT see such people on your evening news or in the paper as poster children for the suffering masses that are losing their homes. However, it seems their are a LOT of such people out there.
But if you were sitting on a house that was $200k underwater and could still make the payments, what would you do? How much underwater would you need to be to decide to pull the rip-cord?
I can't argue with you that falling values lead to higher defaults. That's absolutely true, and a basic finance concept that the bankers certainly knew about before they started lending on higher percentages of loan-to-value.
The issue here is that after the fact, once the loan is already made, the recourse issue probably has little impact on the outcome. If the loans were recourse, the rate of failure would be similar, it would just be priced differently. As a practical matter, the lenders would not be much better off, because their real world ability to collect on the deficiency in a cost-effective and timely matter would be modest in comparison to the cost of the hit to both them and to the borrower.
From what I've read, this last go round of real estate silliness actually involves A LOT of people who decided to become investors.
But even they didn't expect to lose money. Except for the complete scammers who brazenly committed fraud, just about everyone jumped in with the idea of being winners.
My point is that recourse language isn't a deterrent to preventing instability because very few people enter the deal with the intention of failing. Recourse provisions change the price of failure, but they don't change the likelihood of it. Most people are focusing on the opportunity too much to allow the risks to deter them.
The easiest way to reduce systemic default risk is to improve underwriting standards. The moral hazard argument is fun and allows us to vent, but it doesn't provide a workable solution to the greater systemic problem of collapsing bank balance sheets.
There aren't many of these people. You're attempting to turn the exception into a rule.
I would beg to differ. Although I have no real meaningful stats directly relating to this, I do note that most of the underwater mortgages are in CA, FL, TX. In fact, CA & FL alone make up 50% of them*. I'd say there's a good chance that many (if not most) of these aren't SoV's $200k house on a $20K salary, but more like an $800k house on a $80k salary. If so, that is definitely in the "solid income stream (and maybe some assets)" category.
*Oct '08 stats, http://money.cnn.com/2008/10/30/real_estate/underwater_borrowers/index.htm?postversion=2008103108
My point is that recourse language isn't a deterrent to preventing instability because very few people enter the deal with the intention of failing. Recourse provisions change the price of failure, but they don't change the likelihood of it. Most people are focusing on the opportunity too much to allow the risks to deter them.
But the point of decision isn't when the borrower first gets the loan; it is when he is deciding if he wants to stay in it.
Non-recourse may have been "de facto" prior to the bubble, and even during it, but I think it likely that the rules might have changed if indeed we start seeing foreclosures on people who do actually have assets & income worth pursuing.
RW you said: "My point is that recourse language isn't a deterrent to preventing instability because very few people enter the deal with the intention of failing.................My point is that recourse language isn't a deterrent to preventing instability because very few people enter the deal with the intention of failing."
Unfortunately the government FORCED banks to disregard proper underwriting via the CRA. That force dates back the about 1995. Further, Fannie Mae actually had a "target" of over 50% of the loans it bought being to "underserved", "lower income" parties who could not possibly meet good underwriting standards. Of course, that same demograhic is the MOST likely to not understand what they're getting into with a mortgage, especially a hybrid one. In my area, Long Island NY, if you look at foreclosure mapping, the only high foreclosure rates are in areas where CRA lending practices would apply.
However, my earlier point about pure "investors" and bad faith borrowers, was simply meant to point out that these people, and there a lots of them, DESERVE to be hit with recourse. Even good faith borrowers should be made aware so that they can adjust expectations. tis s one area where lawyers come in handy. The norm in my area is to have lawyers handle everything, as opposed to title companies in many other areas. Since the lawyer is representing YOU, he'll point out tall sorts of pitfalls BEFORE you sign anything.
Since today is a day for taking some notice of evidence, it is worth noting that the Brits had mortgage interest deductions. They got rid of them after the previous housing market bust. That did not stop them having another house price bubble; and now bust.
I think Megan's just a little too eager find some way to make the mortgage interest rate more than it is, so she's hunting around for someone who lives or dies buy it. Plus, she's never filed a joint return, much less a return with dependents, so she just doesn't know what the facts are, and finding out what they are don't support her "It's an unfair give away" argument.
As I said on the other thread, anyone who's making enough money to have a big enough mortgage and a high enough tax rate for the mortgage interest deduction to end up being a significantly motivating factor is well on their way to having neither their large income nor their large mortgage.
Maybe that's not easy to hear if you're paying steep rent for shitty digs and think you ought to get pay with pre-tax money. But sort of in reverse to the high income high mortgage fellow, if your income is so low that that 25-35% would make a difference, you probably shouldn't be spending so much on rent that it would make sense (if rent were deductible) to itemize instead of taking the standard deduction.
But the point of decision isn't when the borrower first gets the loan; it is when he is deciding if he wants to stay in it.
As I noted, once a borrower gets to that point, his options are often fairly limited. He's going to get hosed by someone -- it's a matter of which of the creditors take the greatest hit, and the exact cost of the hit.
The net result of a recourse scenario may be that a bit less ends up being paid to the credit card company and a bit more goes to the mortgage lender. In the big picture, the difference is probably not meaningful.
Unfortunately the government FORCED banks to disregard proper underwriting via the CRA.
Actually, they didn't. If you research the subject (and by that, I don't mean reading the talking points on political blogs, but by reviewing the actual loan data), you will learn that default rates on loans in qualified census tracts made by non-CRA lenders defaulted at higher rates than those made by CRA lenders.
The proportion of the loan volumes in those markets being generated by CRA lenders was declining, not increasing -- non-CRA lenders were the most motivated to jump in. The CRA lenders were more inclined to hold the loans in their own portfolios and less likely to use loan products that would involve substantial payment increases (which are usually the culprit in triggering the default), so their portfolios performed better.
You should also note that multifamily projects also qualify for CRA credit. A lot of the CRA dollars were plowed into building privately operated low-income apartments with corporate and and institutional investors, not winos and heroin addicts.
Conservatives have attempted to turn loan defaults into a political issue, in order to deflect from their own failures to properly regulate the system. In the process, they've ignored a lot of data and haven't looked at most of the pieces.
The real problem was with poor underwriting standards that loaned too much money, to both the "right" and the "wrong" people, with no collateral cushion. These policies were pursued because they were profitable at the time, facilitated by an active securitization market, so it seemed like a good idea to those who sold the money. As a consequence, we have prime defaults leading the default parade, and a much larger balance sheet problem to boot. It isn't what you believe it to be.
Tony Comstock: The mortgage interest deduction is HUGE in the early years of a mortgage.
A 6%, 30 year mortgage for $200,000 comes out to about $1200 per month.
In the first year Interest payments equal $11,933. Second year interest is 11,781. By year 10 they're still over 10 grand. When one factors in deductions for any local property taxes and any state/local income tax deductions, the impact on taxes can be quite large, especially for middle income people in high tax areas.
So add on another $7K for taxes. What does that get us? About $18K, Right?
Minus $12K is $6K.
35% of $6K is about $2K/year
If you live or die over $2K/year, you need to look for cheaper digs.
Here's another data point I'd bet a lot of people don't know.
When you go to qualify for a loan and include rental income in your household, the underwriter only counts ~75% of the income in the qualifying formula. It's for an underwriter to do this because the cost of ownership is more than principle, interest, taxes and insurance.
Backing that out the other way, anyone who uses mortgage interest dedcution to talk themselves into buying a house is a fool. Costs of ownership are going to devour what little benefit you get from that.
The trouble is when Megan (and others) talk about personal finance, they talk about it like it's a micro version of a big wall street deal, where an 1/8th here or a quarter there makes a difference; where paying APs on teh last day makes 10 salaries worth of float, plus a nice profit.
On a personal scale, the reality is one late fee will wipe out 10 years of float, plus all the anxiety about paying at the last possible minute.
Mortgage interest deductions are only slightly less irrelevant. Cleaning up my credit report (see angry credit score post from a few days ago) and taking advantage of the drop in interest rates is going to save me about double what I actually gain from the mortgage interest deduction.
But that's no fun to post adn argue about because that's entire under each and every person's control. (BTW; I got all three black marks erases and my CS is now right around 800. Our payment should drop by about $130 starting in May!)
So yeah, the mortgage interest deduction is bunk. So is the fuggin lymes disease the ticks out here carry. Neither are going anywhere anytime soon.
To express Tony Comstock's point here in a different way. To know what you are getting:
-First, you have to calculate the difference between the itemized tax deduction and standard deduction.
-Then, you have to apply your tax bracket to the difference between the two deduction amounts in order to calculate the net value of the deduction.
A family in a 25% tax bracket in a moderate housing market isn't saving that much money, particularly if they live in a state without an income tax. You need to do the math -- the amount of the deduction does not come close to equally the amount saved.
Okay, move over Bearded Spock. I'm RW's boyfriend now!
RW: Realtytrac.com and Propertyshark.com must be conservative tools.
I just checked propertyshark foreclosures for some of the dung hole areas near me. In Freeport, NY and Hempstead the vast majority of plaintiffs ARE CRA banks like WAMU, Wachovia, etc. Same goes for beautiful Hempstead, NY, and Roosevelt, NY.
Freeport and Roosevelt, another dung hole, show 658 between them. Right next to these places is Merrick, which covers and area the same as the other 2 combined. 59 foreclosures in, non CRA, Merrick.
We can go to CRA dump Hemsptead, NY and see 536 foreclosures. Drag the map to the next town north, non CRA Garden City, actually bigger than Hempstead, and you get 33 foreclosures.
NONE of this is new builds or any other sort of development. It's all resales because these areas are all fully built out and have been for 30 years.
By the way, liberals always decry the "segregation" on Long Island but it never occurs to them that they could solve that by simply moving TO these wonderful CRA areas. They'd get far more house for one third to one half they pay in other areas. They NEVER do that. Could it be because they're total hypocrites, not willing to put their money where their mouth is?
I just checked propertyshark foreclosures for some of the dung hole areas near me.
Thanks for that completely irrelevant exercise, but you obviously missed the point.
You claimed, wrongly, that lenders were "forced" -- sorry, I meant "FORCED" -- to lend in CRA markets.
The data clearly disproves that. The flow of funds came from **non-CRA lenders** (maybe I should type that in all caps) who didn't need to be there in those markets at all. They not only wanted to lend there, but they ramped up their operations so that they could take market share away from the CRA institutions.
That's just a fact. There is no political philosophy, no matter how backward or Neanderthal, that can undo this historical data point.
I am not saying that risky areas aren't risky -- they are -- but that lenders eagerly and happily pursued the risk, voluntarily. They did it to make money. Greed trumps good judgment just about every time.
I am certainly not arguing that we should make home loans recourse loans. And neither is anyone else, as far as I know, proposing to take large amounts of extra money from the homeowners and transfer it to the lenders in order to make up for the fact that their collateral isn't worth what it once was
Well you have no one but yourself to blame if people misunderstood:
It seems to me that this sort of acts like borrowers shouldn't have any obligation to repay money on an asset that has fallen in value--as if there were some sort of moral right to take highly leveraged bets on housing and pass off any losses to someone else. The borrowers ought to have known that they couldn't be repaid, because of course the natural and right thing to do, in the event that an item you have purchased on credit falls in value, is to default on your loan.
If this was not an argument that borrowers should have a continuing obligation to pay, rather than default, than what was it?
There seems to be some confusion regarding recourse and non-recourse mortgages. The only states with non-recourse mortgages are Alaska, Arizona, California, Connecticut, Florida, Idaho, Minnesota, North Carolina, North Dakota, Texas, Utah, and Washington.
Source: www.helocbasics.com
Felix is totally and completely wrong on the mortgage interest deduction.
Mortgages are front-loaded so that for the first 1/3 of the term you are paying mostly interest. so all of those recent buyers are paying 80-90% of their payments just in interest.
Plus you add in deductions for property taxes, etc and you get a significant deduction on your taxes.
Long time owners don't see as much value, but inflation, etc mean that they make it up by keeping larger portions of their paychecks anyway.
Don't forget that not all real estate is sold to married couples. Nobody ever seems to mention the tax situation of people who cannot file jointly and get the higher allowances for just about everything.
People who are legally single (including divorced, widowed, and gay people) see a benefit from the mortgage interest deduction at much lower levels of interest paid. The standard deduction for a single person in 2009 is only $5,700. It's easy to get above that, especially with state and local taxes.
I'm in the single category. And I would STILL favor abolishing the mortgage interest deduction and replacing it with a higher standard deduction that would eliminate the need to itemize for most people. If we then want a special-purpose subsidy for anything, let's subsidize saving rather than borrowing.