I still believe the one of the first thing I learned from a econ professor. Marginal this equals marginal that. As the buyer pool can afford more house due to market distortions made by legislation - prices go up. Resources such as capital are mis allocated. Doing away with the non recourse loan and tax incentives might be wise. It would drive the price of houses down further. Which in the long run is probably a good thing. I think everyone would be better off if housing were cheaper. There are a lot of people buying houses in CA right now because of FHA loans... which entitle them to only put 3 percent down. Some of those people even know if prices collapse further they can walk away from a minimal investment. My question is - should this FHA program be stopped. Do our politicians have the balls to stop the socialism.
I'm from Washington DC area and I see the same thing happening here....many people who are not qualifying for the conventional loans are taking out the FHA loans instead, thinking they can walk away when prices go down further (or due job loss), their risk is only 3%..plus pretty much anybody can get a FHA loan even with a poor credit score. FHA loans are booming like never before. I wonder how this is going to end?
What was so wrong with telling the homeowners the truth in the first place? Just saying: Sir, you can only afford $156k and not $225k. So you'll need to change the way you're shopping. You'll need to look for a different home, one within your affordability range. Too many folks allowed realtors, and others, to sell them the line: We can get you into more house and maximize your purchase power if we do.... I knew a guy who wanted to purchase a Benz. He'd saved about $20k and called me to go look with him. We got to a dealershiip and started looking over the used vehicles. Even found a nice one for him in the $17k range. Then came the salesman and the pitch, "For that kind of money you know we can get you into a new car?" I emphatically told him buy the used one! Long story short, after the salesman and finance manager got through with the guy he had a brand new Benz. $15k was his downstroke, and he had sixty months of payments coming. We left the dealership and went directly over to a tire store where he dropped another $3k on new rims. The car was repo'd within the second year. I see the guy from time to time rolling around in a used Hyundai. I guess I'm cruel because I have little sympathy for him!
Yeah they tried to pull the similar kind of schtick with me when I was getting my mortgage. I went in to qualify for an fha 30yr fixed 5 years ago and I had my payment in mind and how much I wanted to spend on a mortgage. Then we came up with my numbers and then I told them that I would like to take out an ARM loan instead which was at a MUCH lower interest rate at the time. When the lender heard that their eyes just lit up, suddently they were telling me I should forget about the small 2 bedroom condo and with an ARM loan I can afford a much bigger house, and I'll make more on the house appreciation, or the best was MY REALTOR telling me to use the lower payment on the ARM and do a cash out by doing 100% financing, etc. I had remember thinking why they kept trying to get me to take out a bigger loan when I'm only putting 3% down. I finally told them no and kept my mortgage amount the same and took the ARM.....looking back it was by far the best decision. I'm sure a lot of people got talked into buying a bigger house by these lenders and realtors. I guess my annoyance is that you had a bank and a borrower. They both screwed each other, bank making a stupid loan to someone who clearly can't afford it and a home owner who decided to take a loan they knew they couldn't payback if the ARM resets.....yet we are bailing out the bank but not the borrower. We should either be bailing out both, or my preference is bail out neither. It seems silly to bailout 1 party and not the other when they were both at fault.
I think the problem is that we don't have the stomach to let it happen as it should. The number of poor decisions made is quite massive. There are a ton of banks and borrowers out there who just wanted to "get over" on each other. I had a banker friend who called it, scam purchasing by using future apprecaition for down payment and praying to keep the job and get raises to hopefully catch up. I seem to remember looking at a home developer's PUD plan and sales projections once. He projected selling homes over a four year sales period and had projected price increases over the term. He also provided the information to the realtors/buyers for helping his sales. And I think a lot of buyers use this type of stuff in determining to buy, "more than they can afford" or not also.