Jaw Breaker wrote:
The implication in giving such loans (and therefore the fallacy) is that housing prices will always go up. But as with any asset, whether it's stocks, gold, or real estate, the price can go down. And as I showed above, if you have very little equity, such as 3%, a very tiny drop in prices puts you almost immediately under water. Now if it were just the lenders/banks who were making these loans, with no government guarantee, I wouldn't have as much of an issue...let the banks making risky/stupid loans fail. But when there is a guarantee by the federal government, the costs inevitably fall back to the rest of us.
The issue was more with the variable rates. Besides it being a situation that costs you more money, there is not a whole lot inherently wrong with around 5% down. The more you can put down the better but it is clearly manageable. They even built in PMI to protect more against the higher risk. If someone is buying a house or condo to live in for 20 years then it is fine. The homeowner would be smart to pay above and beyond that to get rid of PMI though.
The problem comes in when the rate changes during the loan. Obviously, people could only afford the payment with the low rate so you are literally giving them a loan they cannot afford. Most of these people would not have qualified for a fixed rate at what they ended up paying. That's why they didn't take the more stable and better fixed rate mortgage. Then, when housing prices crashed you put them in a situation where they had a payment they couldn't afford on a house that they couldn't sell without taking even more of a loss.
I'd make all mortgages be fixed rate, but you know, personal responsibility is all we should need so let's not regulate it because the actions of colluding banks don't put us in bad situations.
Login
Register
FAQ
Search
