halfnote19_IHB
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<a href="http://online.wsj.com/article/SB122325772150706655.html">Wall Street Journal</a>
Not everyone should own
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halfnote19_IHB
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From WSJ:
<blockquote>Americans can take out a mortgage more or less as a one-way bet. If you can't afford the repayments and can't refinance, you just send the keys back to the bank. Borrowers wipe their hands of liability. So, naturally, an American in financial strife will pay off debts that carry personal liability -- such as credit cards -- before they pay off their mortgage.</blockquote>
Why is it that a mortgage (the most debt someone can acquire) is nonrecourse?
<blockquote>Americans can take out a mortgage more or less as a one-way bet. If you can't afford the repayments and can't refinance, you just send the keys back to the bank. Borrowers wipe their hands of liability. So, naturally, an American in financial strife will pay off debts that carry personal liability -- such as credit cards -- before they pay off their mortgage.</blockquote>
Why is it that a mortgage (the most debt someone can acquire) is nonrecourse?
IrvineRenter_IHB
New member
[quote author="halfnote19" date=1224060488]From WSJ:
<blockquote>Americans can take out a mortgage more or less as a one-way bet. If you can't afford the repayments and can't refinance, you just send the keys back to the bank. Borrowers wipe their hands of liability. So, naturally, an American in financial strife will pay off debts that carry personal liability -- such as credit cards -- before they pay off their mortgage.</blockquote>
Why is it that a mortgage (the most debt someone can acquire) is nonrecourse?</blockquote>
The tradition of non-recourse loans in the United States began as a reaction to the foreclosure problems of the Great Depression. It is supposed to prevent lenders from being predatory or foolishly aggressive in their lending practices. As we all have witnessed here in California, a non-recourse state, it did not prevent lenders from being stupid. Our non-recourse laws are also one of the reasons the lenders losses have been so large.
The author of the article grossly overestimates the chilling effect of recourse lending. It would do nothing to give Californian's pause in taking out loans they could not afford. It would, however, create a huge number of bankruptcies in a market crash because people would need to take that extra step to get out from under the debt. When someone losses $250,000 on a house, there is no way they can ever pay that back. Recourse or not, it simply is not going to happen. To try to force it will only lead to bankruptcies. I think the opposite of what this author recommends is more appropriate: make all residential loans non-recourse. The onus should be on the lenders not to give the loans to people who will not pay them back. That is their business.
<blockquote>Americans can take out a mortgage more or less as a one-way bet. If you can't afford the repayments and can't refinance, you just send the keys back to the bank. Borrowers wipe their hands of liability. So, naturally, an American in financial strife will pay off debts that carry personal liability -- such as credit cards -- before they pay off their mortgage.</blockquote>
Why is it that a mortgage (the most debt someone can acquire) is nonrecourse?</blockquote>
The tradition of non-recourse loans in the United States began as a reaction to the foreclosure problems of the Great Depression. It is supposed to prevent lenders from being predatory or foolishly aggressive in their lending practices. As we all have witnessed here in California, a non-recourse state, it did not prevent lenders from being stupid. Our non-recourse laws are also one of the reasons the lenders losses have been so large.
The author of the article grossly overestimates the chilling effect of recourse lending. It would do nothing to give Californian's pause in taking out loans they could not afford. It would, however, create a huge number of bankruptcies in a market crash because people would need to take that extra step to get out from under the debt. When someone losses $250,000 on a house, there is no way they can ever pay that back. Recourse or not, it simply is not going to happen. To try to force it will only lead to bankruptcies. I think the opposite of what this author recommends is more appropriate: make all residential loans non-recourse. The onus should be on the lenders not to give the loans to people who will not pay them back. That is their business.
No_Such_Reality_IHB
New member
[quote author="IrvineRenter" date=1224064884]
The tradition of non-recourse loans in the United States began as a reaction to the foreclosure problems of the Great Depression. It is supposed to prevent lenders from being predatory or foolishly aggressive in their lending practices. As we all have witnessed here in California, a non-recourse state, it did not prevent lenders from being stupid. Our non-recourse laws are also one of the reasons the lenders losses have been so large.
</blockquote>
Isn't it ironic the the credit and housing bubbles are the result of the sense of entitlement for everyone to partipate in the riches of real estate.
The tradition of non-recourse loans in the United States began as a reaction to the foreclosure problems of the Great Depression. It is supposed to prevent lenders from being predatory or foolishly aggressive in their lending practices. As we all have witnessed here in California, a non-recourse state, it did not prevent lenders from being stupid. Our non-recourse laws are also one of the reasons the lenders losses have been so large.
</blockquote>
Isn't it ironic the the credit and housing bubbles are the result of the sense of entitlement for everyone to partipate in the riches of real estate.
IrvineRenter_IHB
New member
I wrote this in the book:
Before a policy can be formulated, there needs to be an open discussion of the goal of maximizing home ownership. Owning a home has become synonymous with the American Dream. Every Presidential administration has had the expansion of home ownership as one of its goals. The tax code is structured to give tax breaks to home owners to encourage home ownership. The idea of home ownership is deeply embedded in our culture.
Managing the rate of home ownership is analogous to managing the rate of economic growth. It is not the policy of our government or the Federal Reserve to maximize economic growth. Instead, the Federal Reserve balances economic growth with inflation and tries to manage economic growth to keep it on a sustainable path. This policy grew out of our painful history of economic cycles of boom and bust. It was realized that economic growth must be tempered to a sustainable level to minimize the damage of economic downturns. Similarly, the rate of home ownership should not be maximized. Home ownership will never reach 100%, and this should not be the goal of housing policy. Just as economic growth is tempered by the rate of inflation, home ownership rates are tempered by the rate of default of mortgage loan programs.
The harsh reality is that a certain percentage of the population lacks the desire, discipline or responsibility requisite to be a homeowner. There is a percentage of the population who do not want to be homeowners. Many people require mobility to pursue career opportunities or other goals. Some people like the freedom of renting and do not want the responsibilities of home ownership that go beyond monthly payments. There are some people who simply do not make housing payments consistently. This group is not capable of sustaining home ownership. There may be opportunities for policy initiatives to increase education to make this group smaller, but there will always be some people who cannot or will not do what is necessary to keep a house: make their payments. There is a percentage of the general population who should be renters.
There is a natural, sustainable level of home ownership. Home ownership rates in the United States increased markedly at the end of World War Two as the 30-year fixed-rate mortgage became the commonly accepted vehicle of home finance. In the 60 years that followed, home ownership rates stabilized between 60% and 65% through good economic times and recessions and interest rates ranging from below 6% to above 18%. Subprime lending demonstrated that increasing the home ownership rate through the widespread use of lending programs with high default rates is inherently unstable. Managing the home ownership rate is not a subject of governmental policy. Any legislative initiative to specifically limit home ownership rates would be politically unpalatable; however, either a market-based initiative or a legislative initiative that prevents the widespread use to loan programs subject to high rates of default rates would effectively manage the home ownership rate and prevent painful declines in that rate. Home ownership rates decline as homeowners become renters, a painful process known as foreclosure.
Before a policy can be formulated, there needs to be an open discussion of the goal of maximizing home ownership. Owning a home has become synonymous with the American Dream. Every Presidential administration has had the expansion of home ownership as one of its goals. The tax code is structured to give tax breaks to home owners to encourage home ownership. The idea of home ownership is deeply embedded in our culture.
Managing the rate of home ownership is analogous to managing the rate of economic growth. It is not the policy of our government or the Federal Reserve to maximize economic growth. Instead, the Federal Reserve balances economic growth with inflation and tries to manage economic growth to keep it on a sustainable path. This policy grew out of our painful history of economic cycles of boom and bust. It was realized that economic growth must be tempered to a sustainable level to minimize the damage of economic downturns. Similarly, the rate of home ownership should not be maximized. Home ownership will never reach 100%, and this should not be the goal of housing policy. Just as economic growth is tempered by the rate of inflation, home ownership rates are tempered by the rate of default of mortgage loan programs.
The harsh reality is that a certain percentage of the population lacks the desire, discipline or responsibility requisite to be a homeowner. There is a percentage of the population who do not want to be homeowners. Many people require mobility to pursue career opportunities or other goals. Some people like the freedom of renting and do not want the responsibilities of home ownership that go beyond monthly payments. There are some people who simply do not make housing payments consistently. This group is not capable of sustaining home ownership. There may be opportunities for policy initiatives to increase education to make this group smaller, but there will always be some people who cannot or will not do what is necessary to keep a house: make their payments. There is a percentage of the general population who should be renters.
There is a natural, sustainable level of home ownership. Home ownership rates in the United States increased markedly at the end of World War Two as the 30-year fixed-rate mortgage became the commonly accepted vehicle of home finance. In the 60 years that followed, home ownership rates stabilized between 60% and 65% through good economic times and recessions and interest rates ranging from below 6% to above 18%. Subprime lending demonstrated that increasing the home ownership rate through the widespread use of lending programs with high default rates is inherently unstable. Managing the home ownership rate is not a subject of governmental policy. Any legislative initiative to specifically limit home ownership rates would be politically unpalatable; however, either a market-based initiative or a legislative initiative that prevents the widespread use to loan programs subject to high rates of default rates would effectively manage the home ownership rate and prevent painful declines in that rate. Home ownership rates decline as homeowners become renters, a painful process known as foreclosure.
graphrix_IHB
New member
<a href="http://online.wsj.com/article/SB122351051370717359.html">Dr. Vernon Smith had a great point in his op-ed piece for the WSJ</a>.
<em>Housing is one-third of all U.S. wealth, totaling $19.4 trillion in the second quarter of 2008, according to the Federal Reserve. Almost all of the mortgage debt on those assets will be paid. Only a subset of homes funded recently with low down payments at unsustainable prices are at risk. <strong>All of you who rent -- a respectable American tradition -- can look forward to buying more cheaply in the future. Take your time.</strong>
The housing disaster-in-motion was widely reported, complete with warnings, before the crash. But every word fell on deaf ears, because bubbles are never about reason, cool calculation and courageous politicians willing to risk defeat.</em>
It's nice to know that a Nobel prize winner acknowledges the fact that the warnings were there. He may be referring to academia, like Robert Shiller (who he has worked with before), but knowing we were on the same page as those who sounded the warnings is a good feeling.
<em>Housing is one-third of all U.S. wealth, totaling $19.4 trillion in the second quarter of 2008, according to the Federal Reserve. Almost all of the mortgage debt on those assets will be paid. Only a subset of homes funded recently with low down payments at unsustainable prices are at risk. <strong>All of you who rent -- a respectable American tradition -- can look forward to buying more cheaply in the future. Take your time.</strong>
The housing disaster-in-motion was widely reported, complete with warnings, before the crash. But every word fell on deaf ears, because bubbles are never about reason, cool calculation and courageous politicians willing to risk defeat.</em>
It's nice to know that a Nobel prize winner acknowledges the fact that the warnings were there. He may be referring to academia, like Robert Shiller (who he has worked with before), but knowing we were on the same page as those who sounded the warnings is a good feeling.
High Gravity_IHB
New member
[quote author="halfnote19" date=1224060488]From WSJ:
<blockquote>Americans can take out a mortgage more or less as a one-way bet. If you can't afford the repayments and can't refinance, you just send the keys back to the bank. Borrowers wipe their hands of liability. So, naturally, an American in financial strife will pay off debts that carry personal liability -- such as credit cards -- before they pay off their mortgage.</blockquote>
Why is it that a mortgage (the most debt someone can acquire) is nonrecourse?</blockquote>
Because the legislature said so. California has been nonrecourse since the 1870s (Cal. Code Civ. Pro. 726, 580a, 580b, and 580d). But there are exceptions such as it only applies to purchase money debt, does not apply to guarantors, etc. Also, a debt is not dischargeable in bankruptcy if the lender can prove the borrower lied on the loan application which seems to have been the case in many bad loans today. Therefore, I think the losses the lenders are currently suffering are due to the practical reality of not wanting to spend a lot of money on litigation to pursue a destitute borrower rather than purely due to a legal bar to recovery.
<blockquote>Americans can take out a mortgage more or less as a one-way bet. If you can't afford the repayments and can't refinance, you just send the keys back to the bank. Borrowers wipe their hands of liability. So, naturally, an American in financial strife will pay off debts that carry personal liability -- such as credit cards -- before they pay off their mortgage.</blockquote>
Why is it that a mortgage (the most debt someone can acquire) is nonrecourse?</blockquote>
Because the legislature said so. California has been nonrecourse since the 1870s (Cal. Code Civ. Pro. 726, 580a, 580b, and 580d). But there are exceptions such as it only applies to purchase money debt, does not apply to guarantors, etc. Also, a debt is not dischargeable in bankruptcy if the lender can prove the borrower lied on the loan application which seems to have been the case in many bad loans today. Therefore, I think the losses the lenders are currently suffering are due to the practical reality of not wanting to spend a lot of money on litigation to pursue a destitute borrower rather than purely due to a legal bar to recovery.
kevin_IHB
New member
I was a member of a church where the pastor would repeat the same mantra monthly: ?I am not a materialistic man. All I want is to pastor this church for the rest of my life, love my family and own my own home.?
It took me a few months to think about what his statement really meant. There is a deep-seated belief in America that home ownership is a right. So much so that home ownership is the one material possession a pastor can not be reasonably asked to sacrifice for a life of public service. It?s an incredibly bold assertion given that Jesus himself said "Foxes have holes and birds have nests, but the Son of Man has no place to rest."
That pastor eventually was caught up in a scandal in which he lost his church, his wife divorced him and he was forced to sell his home?
It took me a few months to think about what his statement really meant. There is a deep-seated belief in America that home ownership is a right. So much so that home ownership is the one material possession a pastor can not be reasonably asked to sacrifice for a life of public service. It?s an incredibly bold assertion given that Jesus himself said "Foxes have holes and birds have nests, but the Son of Man has no place to rest."
That pastor eventually was caught up in a scandal in which he lost his church, his wife divorced him and he was forced to sell his home?