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The federal government’s housing casino will never play fair as long as there are votes to be bought by cheating

This is my column for this week from the Arizona Republic (permanent link). Since I wrote this on Tuesday, events have overtaken some details, but it remains that few if any borrowers in the Phoenix area will be able to renegotiate or modify their loans under the Obama plan. Everyone who used to have home equity will still get to bear their losses unassisted, however.

 
The federal government’s housing casino will never play fair as long as there are votes to be bought by cheating

To qualify for a renegotiated mortgage under the plan President Obama announced last week, your new loan can be as much as 105% of your old loan — which sounds to me like curing alcoholism with a good stiff drink.

But the people who are in the worst trouble on their loans bought with 100% financing. Even if there had been no decline in values, they probably could not refinance at 105%, not without bringing cash to cover the closing costs.

But, of course, the typical home in the West Valley is down 50% from its peak value in December of 2005.

Suppose you bought a new home for Christmas 2005, paying $275,000. If you get everything just right, you might be able to sell it today for $135,000. You still owe $275,000, but you can refinance your note at only $141,750 under the Obama plan.

Something’s going to have to give.

But what about the people who were move-up buyers in 2005? They may have put 50% down, which means they’ve lost all their equity, but they probably can’t lay claim on a hardship refinancing. What about the people who paid all-cash? Now we’re talking about people who have actually lost real money — their own money.

Meanwhile, many of the people who end up qualifying for restructuring could easily continue to pay on their notes. We all of us pay on our car loans, even though a car loses half its value when you drive it off the lot.

But we don’t think of our cars, clothing, furniture or appliances as investments. By mucking around in the real estate market, the federal government set up a system of middle class welfare, encouraging us to gamble on our homes as if they were leveraged stock issues — or casino games.

This has turned out to have unhappy consequences. A truly free market in real estate would be a boon to us all — but don’t hold your breath. The federal housing casino will never play fair as long as there are votes to be bought by cheating.

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  • 12 comments

    12 Comments so far

    1. Arn Cenedella February 28th, 2009 1:42 pm

      Greg
      I have been saying the same thing for months.
      Almost by definition any mortgage bailout plan is UNFAIR.
      Buyers who put their cold hard-earned cash into a property while people who put nothing into a property might get bailed out.
      Does not make sense.

    2. Arn Cenedella February 28th, 2009 1:44 pm

      Greg
      I have been saying the same thing for months.
      Any mortgage bailout plan is unfair.
      People who bought and put their hard-earned cash into a property get NOTHING while those who put NOTHING in may get help.
      Not fair.
      Arn

    3. Karen Highland February 28th, 2009 4:24 pm

      We had the pleasure of sitting down for 3 hours today with a homeowner who thought he might just sell his home in a short sale and go buy something else at these great new low prices. The mis-information out there is unbelievable. We had a little tutorial session with him starting with the CRA of 1977 going all the way to today’s loan modifications and their probable impact on future rates. We schooled him about how the ‘good intentions’ of government keep ‘fixing’ things for us. Now I’m depressed and wonder if the fixing is ever going to end?

    4. Dylan Darling February 28th, 2009 5:36 pm

      While the plan definitely isn’t fair to all and won’t solve the housing crisis, it will help some needing families out. There isn’t any way for mortgage bailout plan to be fair, yet something had to be done. Its a damned if you do, damned if you don’t situation.

    5. Don Reedy February 28th, 2009 9:12 pm

      Greg,

      About eight months ago my wife and I purchased a TV set for $600. About two months ago the very same TV set was selling for $400.

      I want to give my TV back…..don’t I?

      NO, and as you aptly point out in your analogy about the purchase of an automobile, I didn’t buy the TV with the idea that it was an “investment.” Instead, at the time I purchased it I made an educated choice, purchased actually knowing that ALL electronic devices eventually sell for less, and that I had likely purchased at a price that would certainly be bested in the future.

      Am I crying out for a stimulus rebate? Am I crying out that I was treated unfairly? Am I crying out for assistance in renegotiating a new purchase of my TV?

      Not on your life. Homes are never investments, never were investments, and never should be marketed as investments (unless they truly are 20% down actual investments with pro formas and cash flows accompanying them).

      Live in your home. Celebrate with your family, your pets, your friends and your neighbors. Give up with a sigh of relief the concept that your home is a wager on your future financial prosperity, an instrument of wealth, a vestige of a profitable financial instrument.

      I’ll take my home as it comes now, with a family I love, the comfort, import, safety and pleasure it provides. My home was never a casino. My home was never a bet on the future. My home was never a wager placed on a mortgage broker, securities broker or government employee. No, my home is where my dogs live (and my beautiful wife, Beth).

      My stocks are all wasted away…..

      My home is not a stock, not an instrument, not an entity. My home remains my home. Get out of the mindset of a home as an instrument of wealth, and you will quickly experience your home as an instrument of living.

      “A man’s home may seem to be his castle on the outside; inside, it is more often his nursery”

      Let’s grow up, for once, for all, and know the truth about our homes. Lying about the inherent home will kill all that we plant, all that we nuture, all that we seek to grow. Invest in your home with an investment in those who come to your door, who dine at your table, who laugh and cry with you at your gatherings.

    6. Aaron Catt March 1st, 2009 1:46 pm

      Interesting perspectives.

      Focusing more on those who became eligible to buy with the help of a no doc, interest only short term ARM, I am compelled to believe that the numerous mortgage broker offices, real estate brokerage offices, sales offices, newspaper headlines and sphere’s o’ influence, sold these types of products and the idea with the premise that they would, could and even should make money with their home.

      An asset puts money in your pocket.
      A liability takes money out of your pocket.

      Even as an agent during the recent boom, I thought the gentleman who suggested that idea was crazy because I was watching the comps in my area increase in ‘value’ at an astounding pace. Just imagine how the less knowledgeable buyers who were all ethered up on stainless appliances and granite counter tops got caught up in the mix!

    7. Greg Swann March 1st, 2009 1:55 pm

      > sold these types of products and the idea with the premise that they would, could and even should make money with their home.

      Guilty as charged. And in fact nothing fundamental has changed. I turned away investors for around 30 months, because there was no longer any way to make money in Phoenix. But I’m working with a ton now, and I don’t think they’re wrong to look for future appreciation. The game is fixed, and the trick is not to stand up until the music starts and to sit down before it stops.

    8. [...] to be confused with the “Obama Refinance” that does not allow for a modified loan amount higher than 105% Loan-to-Value of the first [...]

    9. Barry Cunningham March 2nd, 2009 9:18 am

      “Homes are never investments, never were investments, and never should be marketed as investments”…huh???

      Maybe not by anyone who has the least bit of financial sense and doesn’t know the difference between cash flow and appreciation.

      Right now we have and are marketing homes as investment vehicles with GREAT success. People are buying BIG time as they are able to realize cash flow…sometimes significant cash flow with low mortgage rates and substantial demand for rental homes and properties.

      Sold one last week. REO property that was on the market for 102,000. Buyer got it for $89,000. has a renter in the property already paying $1,275.00 per month.

      He’s already put a contract in on another.

      This is the best real estate market…ever!

    10. Dave Shafer March 2nd, 2009 9:30 am

      Maybe you are right about a home not being an investment, but when you look at the middle class, about half their net worth is in “their home.”
      Since, on average, real estate has appreciated 5% over the last 80 years or so, I say it is an investment, if you treat is as such. My home is currently worth twice what I paid for it 9 years ago even after a drop of 35%. My stock ownership is similiar. Just because there are some folks who bought at the height of a speculative bubble, or pulled equity out at the peak and spent the equity on consumer items, doesn’t invalidate the investment. The thing about real estate is that when it comes to your home you have to compare your costs to the alternative, renting. Then you have to look at it over a long period of time (something folks in the middle of euphoria or depression seem incapable of handling), perhaps 10-20 years. Then you can make a decision on whether it is a good investment or not!

    11. Joe Strummer March 3rd, 2009 10:17 am

      A home is not an investment. Real estate may be an investment. Barry Cunningham misses the point. People were “investing” by buying homes they intended to live in and then hoping they’d appreciate 20 percent in two or three years, whereupon they’d sell said homes. That’s insanity.

      Certainly for people with capital to invest, real estate may be a good buy right now. But that is different from what a lot of people were doing in 2004-2006 in Arizona, Nevada, California, and Florida with money that they needed to live on.

    12. [...] to be confused with the “Obama Refinance” that does not allow for a modified loan amount higher than 105% Loan-to-Value of the first [...]