A Down Payment On The Next Mortgage Collapse

Just as we are starting to turn the corner with a housing market recovery, we may already be close to making a down payment – so to speak – on the next debacle in the mortgage market.

It is hard to believe we could repeat our recent mistakes so quickly. Thousands of homeowners who engaged in “strategic default,” walking away from their mortgages because their homes were worth less than they owed, will have blighted credit records for years to come. And private investors are afraid to touch mortgage-backed securities because of all the recent efforts to blame lenders for borrowers’ failure to live up to their obligations.

Yet, amid all this, there is still a chorus of protest at the idea of requiring a substantial down payment for new mortgages. Astonishingly, we are talking about letting a new generation of homebuyers take on the obligations and responsibilities of debt-financed property ownership with little or no money down.

Either this is a case of mass amnesia, or some self-appointed consumer advocates and their water-carriers in Washington seriously misunderstand the role of the financial system. It is not intended to be a conduit to move cash from people who have it to people who merely want it.

The savings and loan crisis of the late 1980s and early 1990s, induced by a housing downturn and turbulent financial markets, left its own legacy on the housing market. One of the lessons we should have learned was that having homeowners put significant equity into their properties is a prerequisite for a stable market. After all, a traditional American mortgage represents a big risk by the lender, who locks in a fixed interest rate for up to 30 years and relies solely on the future earning power of a private individual or couple, secured only by the value of the mortgaged property (or, ultimately, by the federal government’s housing finance agencies). The first person to lose money when a home becomes unaffordable, or when its value declines, ought to be the home’s owner, not the party who accommodated the homeowner’s desire to borrow money for the purchase.

Easy-money advocates ignore this logic. They seem to think poor people are entitled to own the same property as wealthier people. The thing about being poor is that you just don’t have as many assets, including property, as other folks. I am entirely in favor of helping poor people become more affluent, but you don’t do that by just lending them large sums of money that they may, or more likely may not, ever repay. All you have accomplished in that case is to turn poor people into deeply indebted people.

Renting a home is a perfectly respectable way to live while accumulating the capital to eventually buy one, if that is your ultimate goal.

We seem to be stuck learning the same lessons over and over again. Homeownership is simply not for everyone – and I say this after 30 years of homeownership. A house can absorb as much money as you are prepared to give it. Maintaining a home, insuring it and paying the taxes on it are major obligations, which ought not to be lightly undertaken. It is not reasonable to expect lenders to put up all, or nearly all, of the money.

It is even less reasonable when law and politics permit mortgage holders to walk away when their mortgages are unsustainable, or merely inconvenient, and encourage the public to blame lenders for the ensuing losses. The result, as we can now see, is that prospective lenders will become highly reluctant to lend to any but the most secure borrowers.

How many times to we have to go through this cycle before the appropriate lessons stick?

With any luck, this time will be the last. If potential mortgage investors see the world as I do, they won’t touch mortgages that do not have substantial homeowner equity behind them. To attract private capital to this corner of the financial markets, we are going to have to start respecting, and protecting, the people we ask to furnish the capital.

About Larry M. Elkin 564 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

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