Mortgages Are Not a Right

There’s a growing trend to complain at the stricter requirements financial institutions are requiring for new mortgages. USA Today has a whole article filled with people who feel that getting a mortgage is too hard, too long, and too difficult. Everybody claims their mortgage risk would be non-existent.

It seems so long ago, but even qualified loans (those to individuals that should be completely safe) had delinquency rates (at the extreme) of 40% in 2007 for people who put down 5% on the mortgage. The delinquency rates for people who put down 30% or more was still a staggering 2.4% that year.

Just to clarify, even qualified loans where the new owners were putting down a third of the mortgage themselves resulted in 1 in 42 loans being delinquent. That’s huge. For those putting down 10% that number jumps to one in 4.2 being delinquent loans.

Because of failed loans, banks are still looking to repossess 800,000 homes in 2011.

No mortgage is without risk to the lender, and they have all the right they need to run you through a grinder of forms and checks to ensure you’re a good risk. As it is possible to get loans in the US with as little as 3.5% down, it might be time for that minimum to be raised. All numbers show that the less a purchaser puts down, the higher the rate of delinquency. Hence, if you’re putting very little down, the tougher the fiscal review.

If you are really wanting to finance a home, it is substantially easier to get a mortgage the more you put down on the property. Saving more before purchase, or buying a cheaper residence, will both go a long way in securing a loan with less hassle.

Housing Should Be Only For Those That Can Afford It

There are common shared social moments in people’s lives that root their life experience within society.

Assassinations (the “I remember where I was when President Kennedy /Martin Luther King / John Lennon was shot”), Marvels (the “I remember Neil Armstrong’s first step on the moon”) and event experiences (the “I remember the entire scare over the year 2000 bug”) are all common shared social moments.

I must be a little out of phase, because my experience that roots my awareness in society is the great subprime mortgage collapse. The experience has made me a little jaded about the housing industry. Maybe a little more than a little.

The root of the issue is granting people credit that they cannot support.

The housing industry has done a great job in painting a picture that if only everybody had their own home, then financial security would be universal. There is a picture painted that home ownership is a safe, secure, and promising way for people to build equity and generate savings – all very important for that new family who is buying for the first time.

But in the US, we have seen the massive dislocation of people from homes they purchased in the last few years (and it’s still happening with an extended and renewed economic collapse as seen in the most recent job figures). People who never had the ability to properly service their loans were offered amazing housing deals. Low and behold, the mortgagees defaulted and the houses are standing empty.

The UK has recently offered their second new and non-wealthy new-home buying program called FirstBuy. In this process, the developer and the government both take a 10% equity stake (that’s important here) with interest. The new home buyer then needs to put down only 5% of the total cost of the house, and the bank will mortgage the remaining 75%. New home buyers can get a house with 5% down.

Given the history of the US, I am now prone to say that 5% down isn’t enough to show the ability to service the loans (see plural!). One is the bank loan of 75%, the second is the builder and government equity purchase that are really loans. They convert at the 6^th year to interest bearing loans (vs. interest free).  If the unit is sold before the equity loans are paid – the builder and the government get paid out first their share of the selling price.

So what we really have is a 95% mortgage that only people making £60,000 a year or less can apply for.

What does housing costs entail – capital repayment, interest, taxes, utilities, maintenance, and upkeep on the appliances – things indirectly covered in a rental situation with one monthly, predictable, contracted cheque. The problem with owning a house is costs are not predictable – especially maintenance and upkeep. Even in condominiums, we see special assessments which are non-scheduled sums owners are required to pay beyond their monthly contribution.

For low income families which have not proven their ability to service debt, documented through their inability to amass a respectable down payment, non-scheduled costs (like new roofs, etc.) will be beyond their payment ability at some time.

So, incentives like these do nothing to ensure home ownership is a safe, secure, and promising. They heap credit debt on the least able to afford it, offer a discounted rate for 5 years on the belief that life will always be better (ie. make more money to afford the full loan) down the line. It doesn’t always happen, especially for the poorer, where we know their marginal income doesn’t rise.

Until people can get a respectable down payment for the purchase of their house, rental provides an extremely stable, predictable method to secure housing. Further, unlike a mortgage, renting allows for easy mobility – either to lower cost housing, or to move unencumbered from a housing debt to pursue better employment.

PS. That 20% loan held by the government and developer for 5 years interest free, and then jumps, feels a lot like those US subprime financing schemes that people couldn’t afford.