Sunday, June 08, 2008

The lady who lived across the street from me had her house foreclosed a few weeks ago. According to my neighbors, this is a woeful situation deserving of our collective pity. Being naturally skeptical, I reserved judgment for the time being and resisted the pity parade peer pressure, opting instead to probe a bit more deeply into the matter. I suspected the woman in question was really done in by her own fiscal incompetence, not by the allegedly evil and unscrupulous lending industry that's routinely lambasted by the mainstream media and Democrat politicians.

Sure enough, a review of her publicly recorded deed and mortgage documents at the Maricopa County website confirmed my suspicions. The docs, combined with my casual observations of her big ticket purchases over the past two years, reveal a classic case of a looming financial disaster finally coming to the fore. She bought her home with no down payment in January 2006 and financed it with a $236,000 2-year Interest Only balloon payment ARM mortgage at 9%. The prevailing rate for this type of suicide loan at the time was 5.5%, so right off the bat we know this woman either had very bad credit or a high loan-to-income ratio to begin with. Two months after closing on the mortgage, she secured a $20,000 home equity line of credit on the home. A month after that, she somehow was able to get another line of credit for an additional $30,000. Based on my recollection, this is roughly around the same time she started driving a spiffy, new BMW 335. Retail price: $40,000. I also noticed several big ticket items appeared around this time, including a top-of-the-line 56” television that was clearly visible through the living room window from the street, and the delivery of various furniture and new appliances.

Granted, I don’t have all the details of my former neighbor’s financial profile, but from my vantage point all signs pointed to a fiscally reckless individual living in the here and now, from paycheck-to-paycheck, skirting on the edge of foreclosure from Day One. My assessment? Pity for this foreclosure “victim” will not be forthcoming from me. Nor will it be offered for most of the swelling ranks of homeowners who have been foreclosed on in recent months. I’m willing to bet 90% of those people chose a strikingly similar path of fiscal incompetence fuelled by greed and a lust for instant gratification.


At 6/08/2008 3:55 PM, Anonymous Canuckguy said...

You hit it on the nose, this is typical behaviour, the use of home equity as an ATM machine.

As you would know, one big reason we get a lot less of that in Canada is because we do not get the interest on a mortage as a tax deduction. This tax treat in the USA encourages reckless behaviour.

At 6/08/2008 4:39 PM, Blogger Ace said...

Regardless, I'd still take a mortgage interest deduction over not having one any day. Anything to lower the tax burden is fine by me.

I'd argue that the tax deductibility of mortgage interest was really a secondary factor that led to the current foreclosure spike. The big thing was the sheer number of loosely vetted "creative" financing options offered by the US lending industry vis-a-vis Canada. Short-term Interest-Only ARM loans in and of themselves are fine for certain situations, but in many foreclosure cases people were using them to finance homes that would otherwise be beyond their affordability with a standard long-term fixed mortgage with principal payments.

Speaking of fixed mortgages, I still don't understand why people in Canada don't demand that the banks offer true 15-year or 30-year FIXED mortgages. As it stands, the chartered bank oligopoly pigeon holes everyone into fixed or floating ARM loans, potentially costing consumers tens of thousands of dollars over the life of the mortgage due to mandatory periodic rate pegging.

At 6/09/2008 7:06 PM, Anonymous Canuckguy said...

Not to not pick but I stand by the accuracy of my statement “one big reason we get a lot less of that….”.
Not the only reason, not the biggest reason but a big reason. Those in trouble did not take advantage of the mortgage interest tax deduction in a sensible fashion whereas the financially prudent use the deduction to improve their position.

Sure the ‘creative’ financing options enable the financial incompetent to dig a deeper hole to wallow in and is cited as the major reason for the sub prime crisis. However I believe interest deuctibility made it a lot easier to lure in the unwary and the dimwitted. It’s the shovel that enabled the deep hole of creative financing.

In saying the above, I can also agree with your take on it

At 6/17/2008 1:34 PM, Anonymous Eddie said...

The mortgage interest deduction has been around forever. So, saying it "caused" the latest foreclosure crisis would imply that we would always have such crises. There is a benefit, but it's definitely not the driving cause.

I would do away with the mortgage interest deduction if we would lower tax rates dollar for dollar to replace it instead. However, knowing that won't ever happen, I think it's good to have it for at least some relief.

Government intervention in private real estate markets was a big driver in the necessary mortgage debacle. I could not believe that people were saying real estate was a great investment, after having known my entire life that it was an awful investment. The fed cutting rates to near zero was the biggest driver, and being able to deduct mortgage interest certainly didn't help, and the government backing Fannie and Freddie loans to people who should not get them is another big driver.

Before world war 2, it was common for buyers to put down 40% on a house. Now contrast that with today's average American homebuyer.

At 9/23/2008 9:45 AM, Blogger azgopbabeval said...

All I know is that there are plenty of people who have decent to good credit, who can put down at least the 20% being asked by banks, and I hope those people start ponying up & buying houses while it is a "buyers market". I know Dave & I plan to do this shortly after the election.
With the down fall of so many lenders & banks, as well as common fools, why shouldn't we get our dream home at an afordable rate??
I guess you might say I'm just another one of those nasty republicans taking advantage of another American's downfall. And to that I say, "YES, YES I AM."


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