Homeownership: The Root of All Evil, or the American Dream?

Is homeownership the root of all evil, or the American dream? You decide.

What I am talking about the financial burden and tax deduction that come along with it - mortgages. Mortgages have brought riches to corporate America, banks, home builders, mortgage brokers and pure play mortgage companies. It also brought joy, capital appreciation and riches to many individuals.

That was until the middle of last year.

Owning a home is as American as Apple pie. It was so patriotic to do so, that many ordinary citizens purchased second and third homes for vacations, rental income, investments, or to flip and other get rich quick schemes. It all seemed to work… for a pretty good run.

Some not so ordinary citizens purchased homes too. These are the people who are just as deserving to own a real place, but did not fully understand the financial responsibilities or how they will change over time.

We all know how this ended, or do we?

The fall of Bear Stearns (BSC), the run on Lehman Brothers (LEH) and the rumors of Washington Mutual Inc. (WM) add to the fray of firms that the general community thought were at least one step removed from the eye of the storm.

There have been write-downs for banks, i-banks, mortgage companies and it is not over. Default rates are hitting records not seen in 20 years.

In response the Fed has flooded the system with liquidity and lowered interest rates. The global financial community expects another big rate reduction today.

Does it matter?

At first we all thought that the most effected were riskier mortgage, subprime, tier three. The media also focuses on the adjustable rate mortgages, many of which will adjust, meaning change interest rates (and up the rates go) this year. I have one of those initially really low adjustable rate mortgages. It resets in September so I still have some time to refinance. The issue is after talking to my bank is that rates are not all that low for anyone despite the interest rate redutions.

Martin Crutsinger, an Economics Writer for AP posted a piece last Thursday:

Freddie Mac (FRE), the mortgage company, reported Thursday that 30-year fixed-rate mortgages averaged 6.13 percent this week, up from 6.03 percent last week.

Rates on 30-year mortgages dropped below the 6 percent threshold in the second week of January, and stayed there for six straight weeks as the economic slowdown stirred concerns about a possible recession.

However, in the past month, bond markets have grown worried about rising inflation pressures that are coming as the economy slows. Bond investors are always on the watch for any hints that inflation pressures could be increasing since higher inflation erodes the value of their fixed-rate bonds.

Four consecutive weeks of mortgage rates increasing. That is the sad reality facing those with shorter time frames and fewer options than me. Uncle Ben will probably deliver another rate reduction today. The equity markets will cheer. The vast number of us with mortgages readjusting, first time home buyers with a dream, relocations and those still looking to refinance are seeking the benefits of these rate reductions. Over a 15 or 30 year mortgage, we are talking a lot of cake.

Someone tell the bond market it worries too much about tier one paper. I am not the 100th person to write about this topic. We are watching it become a negative self fulfilling prophecy.

If no one can get a decent mortgage than the problem for this section of the bond market will take care of itself. I think it will be called market efficiency. Unfortunately, it will effect the rest of us and the entire economy. This is fixable. It will take cool heads and liquidity in the markets, and that seems to be coming along.

For all of us, the clock is ticking.

Disclosure: The author holds no positions in the companies mentioned.

Comments

[tcornelison]

Fixed mortgage rates are excellent. Rates are currently within .625% of a lifetime low for you so I am not sure why you are whining. Homeownership is and will remain the American Dream. One reason it is a dream is because everyone is not capable of handling the responsibility that goes along with it. The head of Freddie Mac expressed that the other day and everyone wanted to hang him.

It is critical that we return to realistic lending based on common sense underwriting, reasonable debt ratios, required down payments and strict credit criteria. If a borrower can't meet the requirements they will have a little work to do. They may have to actually wait and work towards the achievement of that "American Dream." I think that is why it is called a dream...

By the way if we do what I have stated above you will continue to see home prices fall another 25+% but that is reality. We have to stop living in an American "Dreamworld" and come back to reality or we will begin repeating this cycle before the current one ends.

[WAKEUP]

There are many people in the financial and real estate communities who want another cycle to start, before this one can run its necessary course. House-prices must fall 50%, from 2005 levels, or we are going to have to go through yet another correction, in a few years. And that cycle will require a fall of 70%, from 2005 prices. We can pay now, or we can pay even more dearly, later. There is no apple pie, cotton candy alternative. Everything financial in the U.S., as well as elsewhere is in the stew pot, this time. There are no escape hatches, and no amount of false, misleading, and overly optimistic bull-talk will change that, this time.

[Andrew Corn]

My point is that mortgage companies and banks are overcharging based on today's rates. Let's see if they normalize over the next month.

[smoothlid]

Andrew, they are not overcharging, it is based on the cost of lending the funds in the first place.

Do you know what Fannie & Freddie are imposing on us as mortgage lenders to pass along to you as a borrower?
They have imposed surcharges adding up to 2.75% to the cost of doing a loan. These surcharges are based on FICO socre & LTV, & guess, what??? I got an email today that they are already going to increase them shortly. pretty soon, if you have a 620 or under FICO, and an 80 LTV loan for a cash out debt consolidation refi, I have to charge or absorb somehow 4 % payable to Fannie Mae. on a $250,000 loan, thats $10,000 I have to figure into your deal...that's your equity, being paid to Fannie & Freddie, to shore up the balance sheets there. It kills the avg homeowner/buyer....Thi... is over & above your typical closing costs, & before I make a penny for originating your loan. Know what else??? The PMI companies are clamping down on issuing PMI for all but the most worthy & high scoring borrowers. This is a really bad sign.

Yes the market got ridiculous issuing loans to idots who had no idea what they were doing & never should have qualified. This needed to end. The loose liar loans needed to be curbed, too. But we are in the midst of some of the absolute worst over-reaching and mind boggling credit problem ever faced.

Pretty soon, unless you score 700+, and have plenty of equity or down payment, can fully document your income, etc, you will not be able to get a loan to buy or refi.

This spells further trouble as it shuts out people who need to refi 7 can't, and first time buyers can't buy that discounted home you want to unload. These people need to be able to buy, to trigger other sales.

hang on, it's getting worse!
I'm really worried about the near future.

[smoothlid]

One more thing to add, Andrew....
Rates SHOULD be lower right now. When the rest of the market starts BUYING mortgage backled securities instead of net selling them (due to writedowns, leverage, etc...) we WILL get the rate reduction later this year....rates could go as low as 4.5% on a 30 yr loan.

What needs to happen is Congress should pass the FHA bill, get the new guidelines out there, Fannie should roll back some of the surcharges, & give us a few months of no volatile changes in rates, rules, etc....& then we can work through some of this mess.