Why we should get rid of mortgages

[flashl]

Posted Jul 13th 2008 9:11AM
by Peter Cohan

The slow rolling collapse of the housing industry in this country -- which the Center for Economic and Policy Research estimates could wipe out $6 trillion in housing wealth in 2008 -- has gotten me to thinking about the future. Why do we even have mortgages? What would the housing industry look like without them? Is there a better way? My conclusion is that we should eliminate mortgages altogether. This will cause housing prices to drop, which will make it possible for more people to buy homes instead of living in houses that are really owned by the mortgage holders.

The reason we have mortgages is that the $10 trillion industry supporting them is powerful and self-sustaining. It fuels an enormous housing construction and furniture industry. And there are those in government who think home "ownership" is a worthy social goal. Unfortunately, when people take on a mortgage and then move into a house, the people who live there don't have its title -- the mortgage holder does. Simply put, home ownership is an illusion for most people -- the mortgage holder owns the house until the mortgage is paid off. Instead of renting from a landlord, the "homeowner" is living in a house that's owned by a mortgage holder.

With the rise of securitization, that mortgage holder is no longer the company that originated the loan. It's an investor who holds a mortgage-backed security (MBS) that contains your mortgage and thousands of others. It's an oft-repeated illusion that this is "home ownership." But that illusion is critical for keeping the mortgage industry alive. Unfortunately, if Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) fail, it will be us citizens who will be on the hook for the $1 trillion needed to bail them out.

The concept of home ownership supports an industry that is now collapsing thanks to its shady business practices. In the last year, those practices have led to a 15% drop in the value of the average house, the implosion of the $1.3 trillion subprime mortgage business, $400 billion in bank write-downs related to MBS -- potentially rising to $1.6 trillion, and three million foreclosures which will force them out of the house that the mortgage holder owns.

...

If mortgages did not exist at all, we would not have these problems. So I think it's time to consider whether we can afford to let them exist in the future.

Blogging Stocks

[elocs]

1. I am not sure how "we" can "let" mortgages exist in the future. or not.

I am sure there would be many in the "we" who might not agree with not letting mortgages exist in the future. This seems like throwing the baby out with the bathwater.

[The Velveteen Ocelot]

2. If you eliminate mortgages (or some form of financing) altogether,

how do most people buy homes? I don't know anyone who can write a check for $200,000+. And technically, the author of the article is wrong about one thing: when you have a mortgage you do hold title to the property, subject to the mortgage; in other words, the mortgage is a lien, like the loan you might take out to buy a car. The bank doesn't legally own your house, but under the terms of the mortgage agreement it can, after following certain procedures, foreclose and force a sale to get its money back. If it sold the house for more than you still owed (unlikely these days), it would have to return the excess to you.

There are other financing arrangements, like a contract for deed, in which the seller holds title until all payments are made, but this assumes the seller can afford to take payments in small increments, which most people can't do these days, either.

I think the answer is not the elimination of mortgages, but the regulation of their resale, bundled, as an investment security.

[izquierdista]

9. You don't know any old people??

I find it hard to believe you don't know anyone who has paid off their mortgage. Are you a 20-something just out of school with student loans and no savings? How about your parents? grandparents? aunts or uncles? Some neighbor who has lived in their house for 15 years or more? Surely one of them has paid down the mortgage and doesn't owe the bank a penny.

Contrary to what you think, there are people who own their homes free and clear. They are generally older, having made many, many mortgage payments until finally the loan balance is zero. What has been deplorable about the easy mortgage years has been (a) the number of people who cash out equity in the form of additional mortgage debt and (b) the number of people who live in houses far in excess of their needs and budgets. What's been forgotten in all this is that mortgages are basically for young people starting out in life to help them to be able to afford a house. Anyone who hasn't made a significant reduction in their mortgage debt by the time they are 40 is not really serious about their own personal finance.

I don't own any real estate now, having cashed out in 2005. I'm still looking for a house I want to buy, but I can tell you that I still have money from those sales to cover what I need. (And I don't need a 5000 square foot McMansion.)

[The Velveteen Ocelot]

10. I'm pretty old myself

and no, I don't know anybody with $200,000+ lying around to buy a house with. Certainly there are some people whose houses are paid for (mine is, almost), but that fact doesn't solve the problem of how *most* people can finance a home without taking out a mortgage. That's an entirely separate issue. Good for you that you could do it; most people can't.

[izquierdista]

12. Better mortgages

The current mortgage business was designed by the banking industry to make it simple for the banking industry. Many years ago, when people didn't move around from job to job, it wasn't a negative to tie the money to the property and use it as collateral for the mortgage loan. And the banks liked being able to point to specific collateral on the mortgage loan -- the house right down the street from the bank. Most mortgages were originated by "savings and loans" and were serviced by them, not sold on the open market.

These days, with people moving from job to job, changing houses as they go, that tying the loan to the property generates lots of additional refinancing fees every time a family has to move. A more enlightened mortgage industry would loan the money based on the applicant's income and have the mortgage be portable from one property to the next. But that wouldn't make any fees for the banking industry and would save the average consumer money.

[enid602]

14. mortgages

I've done very well with conventional fixed-rate mortgages over the last 30 years. I recently sold my last house, and have made almost as much from the houses as I have my 401K. I just think they should get rid of the exotic mortgages; if the government really wants to make home ownership more widely available, they should make fixed-rate mortgages available to everyone.

[flashl]

3. The issue is likely moot bc the "we" of "$10 trillion industry supporting them" voice is stronger.

[AndyTiedye]

4. I'm Guessing that The Author of this Piece is a Renter

…and he would love to see all real estate drop by 90% in value.

Homeowners may not agree.

[MicaelS]

18. Renter don't agree

That "homeowners" should be able to deduct their mortgage interest from their taxes.

[AndyTiedye]

19. Landlords Can Deduct Their Mortgage Interest as a Business Expense

If the home mortgage deduction were eliminated, it would place home ownership out of reach of the middle class.

The more well-to-do would just set up a shell corporation to "rent" their house to them, so they'd still get their deduction.

[MicaelS]

20. Really?

How does that deduction help the renter? Do you think the landlord is going to pass that on to the renters in lower rent? Give them a rent rebate? Bullshit, the landlord is going to pocket that money as a bonus.

So explain to me the fairness of someone who pays $900 in rent and gets nothing back at the end of the year, while someone who pays $900 a month in mortgage payments gets thousands of dollars back in interest payments on their income taxes? THAT is a Progressive or Populist value?

You aren't getting the message....

Either remove ALL mortgage interest deductions for EVERYONE or give some sort of assistance to those who can't qualify for a mortgage.

[AndyTiedye]

21. It's More Complicated Than That

How does that deduction help the renter? Do you think the landlord is going to pass that on to the renters in lower rent? Give them a rent rebate? Bullshit, the landlord is going to pocket that money as a bonus.

Your landlord has that deduction today. He has always had it. Businesses can deduct their expenses.
If they took that deduction away, your rent would go up. Do you really think it wouldn't?
Even if you have rent control, the rent control board would allow an increase under those conditions.

If you only eliminate the home mortgage deduction, then our tax policy favors landlords over homeowners,
so eventually most residential real estate would be owned by corporations.

The wealthy could still afford to buy homes, of course, but the middle class, which is already being
squeezed, would be shut out completely.

The "give some sort of assistance" part may become a really good idea real soon now. Focus on that.
Will anyone qualify for a mortgage if Freddie Mac and Fanny Mae go belly-up?

[Lorien]

5. Not sure what planet this guy is from

(snip)

As an example, consider a house purchased for $200,000 in 1980 with a 20% down payment and a 30 year 8% fixed rate mortgage. Let's assume that the price of the house appreciated to $350,000 in 2010 for a $150,000 increase. But to pay off the $160,000 mortgage, the borrower paid a total of $422,647 in principal and interest. (This is based on a monthly payment from Mortgage Calculator of $1,174.02 a month - multiplied by 360 payments over 30 years).

If you take those fees and interest into account, taking on a mortgage to "buy" a house does not look like such a good deal. It turns the $150,000 "profit" if the house is sold in year 30 into a $112,647 "loss" (due to the $262,647 you spent in interest and fees over and above the $160,000 you borrowed offsetting the $150,000 rise in the value of the house -- and this loss calculation excludes your $40,000 down payment). Mortgages are like casinos -- on average the house always wins.

(snip)

A $200,000 in 1980 would have been a freaking mansion, probably worth over a million today. I bought my own home in 1997 for $155,000. Today, even with the downturn, it's worth between $350,000 to $400,000 (the neighborhood has been gentrified a good bit since I bought it). During the height of the housing boom it was worth half a million. The guy's numbers are more than a wee bit off.

[wtmusic]

6. Something else he ignores

is that if you don't buy you still have to live somewhere. To rent that same house for thirty years, you're ±$320,000 in the hole, with nothing to show for it. :crazy:

[Lorien]

8. Exactly. The apartment I was renting before I bought my home

was only $30 less per month than my mortgage-and I didn't get to write off anything come tax time. Since I run a business from my home now, renting is not an option. Rent on a place with similar square footage these days would be unaffordable for me.

[redstateblues]

7. A 15 year mortgage is the only way to go

the amount you save on interest paid to the lender is significantly less. It keeps you from buying a house you can't afford as well

[muriel_volestrangler]

22. I think he's just shown himself to be someone you should never take financial advice from

a bit embarrassing for someone who blogs about stocks, and teaches management at a college. And runs a venture capital company :wow:

[Turbineguy]

11. There are plenty of banks

who have almost no mortgage problems. That's because they use a different metric. They only lend up to 85%, they don't make "liar loans", and they only accept creditworthy customers.

In any case it was the secondary finance market with its 97% leveraged investments that caused the problem.

[dixiegrrrrl]

13. Back "in the day" of my grandparents

before the Depression, so I have been told, you bought a house by putting
about 50% down, the rest due in 6-12 months.
Or inherited your parents place.
Most people were renters.
Along came mortgages, brain child of FDR era, later along came financial vampires to make money off of mortgages. ( brokers, mortgage companies replacing the local bank, title insurance, escrow, mandatory insurance, etc.)
The only way to come out ahead in buying a house for long term is to make 20% or more down, no escrow, no PPI, no pre-payment penalty, get decent loan rate, and then make "additional principal" payments on a 30 year mortgage, in effect paying it off in 15 years, thus saving tons in interest. We are doing this. Will save 60 k in long run.
Caution: this does not work in overheated markets.
Works fine in small out of the way places.

Same idea works works for buying a car.Car salesman happy to write that small down, long interest payment contract, not so happy when you pay off the car with the money you had saved just for that reason.
Great way to raise credit score.

[eilen]

16. People used to save money

for homes and college. Of course prices were not so out of sight so it was attainable. Plus families used to live together (multi-generations). My grandparent's home cost $3,000 back in the early 1940's. Prior to this they lived in a duplex owned by my great grandmother (one of her "little investments"). My grandfather's older sister and her family lived in the other apartment and I am sure they all paid rent to my great grandmother.

My parent's first home in a new suburb cost $20,000 in 1969. Of course my Dad's salary was something like $189 a week (biweekly?) as a bank manager and my mother didn't work, they had two cars only because my mother had a VW Bug before they married. That home today runs about $139,000--give or take $10,000. Of course, this is in a part of the country that sat out the real estate bubble so there was no great mark-up nor correction.

We have a 15 year mortgage but it didn't start out that way. We started with an FHA 30 year fixed rate loan, later refinanced to a 15 year fixed rate at 2.5 points lower than the original loan. We didn't take any cash out as our goal was to pay the house off faster with less interest. Within about year we were at 20% so no more PMI. In 1998 our home cost $82,000; it is a modest split--a little under 1500 sq ft. As we are a family of 3, we don't need more room than that. Our taxes are about 3% of assessed value and run high compared to the rest of the country; however our school district has a quality not seen in other states/ communities with similar home prices. Life is full of such trade-offs. It would have been nice to have had half of the mortgage saved and we most likely would be incredibly much closer to paying off our mortgage if that was the case. At the time, we had credit card and student loan debts rather than stellar savings. Which is kind of sad as that is the case today of many people in their mid twenties to mid thirties who long to be homeowners.

[dixiegrrrrl]

17. yes, of course...the other key to the kingdom, so to speak

I was raised to save money and No Debt except mortgage.
That has paid off big time.

[Doctor_J]

15. Safe, honest, afforable mortgages were a huge factor in building the middle class

They allowed hard-working people to own homes while they had families to raise in them. This guy is a crackpot.