Some ideas for reforming the mortgage and housing markets are better than others. Recommending borrowers stop using fixed-rate mortgages at the bottom of the interest-rate cycle is a very foolish recommendation.
Irvine Home Address … 28 COLDBROOK Irvine, CA 92604
Resale Home Price …… $1,199,000
You are a doctor or a lawyer
You got an office with a foyer
And the cocaine decisions that you make today
Will not be discovered till it's over 'n' done
By the customers you hold at bay
Frank Zappa — Cocaine Decisions
The decisions we make today concerning the mortgage and housing markets will have long-lasting ramifications. So far, the policies lenders have been following in cahoots with our government are fostering moral hazard. Now some bureaucrats are trying to undermine the very foundation of prudent borrowing: the 30-year fixed-rate mortgage.
Radical Ideas From a Federal Housing Bureaucrat
By James R. Hagerty
As the chief economist of the Federal Housing Finance Agency, Patrick Lawler … launched a frontal assault on the most sacred element in U.S. housing-policy dogma: the 30-year fixed-rate mortgage loan, providing the right to refinance at any time, with no prepayment penalty. If more members of the audience had been fully awake at this moment, I feel sure that their gasps would have been audible.
The reason people at this event might have gasped is because the 30-year fixed-rate mortgage is a good idea, particularly now at the bottom of the interest rate cycle. The author of this article, James R. Hagerty, obviously disagrees. He is a fool.
Now, Americans are very attached to their 30-year fixed-rate freely prepayable mortgages. They like not having to fuss about the possibility of 28% interest rates in 2032, even though most of us will move or die long before then. They love to refinance every time rates drop and then brag to their neighbors about how much they are saving per month.
Notice the emotional derisiveness in the comments about bragging to the neighbors and the ridiculous overstatement about 28% interest rates after we die. People who managed their risk well by utilizing 30-year fixed-rate mortgages should brag to their neighbors. They were smarter than their neighbors who used adjustable-rate mortgages and assumed interest rate risk. People who use fixed-rate financing can still take advantage of lower interest rates by refinancing, and they lock in protection against higher rates. This is smart.
What they don’t stop to realize often enough is that they are paying a very large price for that privilege– twice.
This is an exaggeration. People do pay a premium for fixed-rate financing, but it isn't a "very large price" as this author erroneously contends.
In the first place, mortgage rates are higher than they otherwise would be. That’s because lenders and mortgage investors must build in protection for the risk that we will prepay and stick them with a lower yield than they were anticipating. Mr. Lawler estimates that Americans pay at least an extra 0.25 to 0.50 percentage point in rates because of this option to prepay without penalty. They also pay another premium-–sometimes a percentage point or two–for having a long-term fixed rate. Over 30 years, that translates into some real money, but no one ever mentions that when bragging to the neighbor.
Notice he slips in another comment about bragging to the neighbors. I suspect this guy has an adjustable-rate mortgage. When interest rates go up and his payments along with them, I wonder if he will feel so smug about his choices. Also, the premiums he stated are a ridiculous exaggeration. Nobody is paying one or two percent more for fixed-rate financing.
In the second place, our nation has created the likes of Fannie, Freddie and the FHA to facilitate these oddball 30-year fixed-rate loans, which aren’t normally provided by the private market.
That statement crosses the line between exaggeration and outright lie. Thirty-year fixed-rate mortgages are not "oddballs" that would not exist if not for the GSEs and the FHA. It may look that way today because there is no market other than what these entities provide, but that is because there is no private market of any kind for mortgages at today's interest rates. If it isn't government insured, it isn't underwritten. These oddball loans have been around for decades, and they are the stable base of a housing market.
For a long while, that seemed like a free lunch. Fannie and Freddie, we were told, were far better able to handle those complex risks than we dumb consumers ever could. But since the government had to rescue Fannie and Freddie in 2008, the taxpayers’ tab for this indigestible lunch has swollen to $145 billion, and it’s still rising. So that’s the second time we’ll pay for our irrational love of American-style mortgages – only this time, we all pay, not just mortgage borrowers.
This guy is saying that the problems with the GSEs are caused by 30-year fixed-rate mortgages. That is a lie, pure and simple. The GSEs got in trouble because they insured and purchased toxic mortgages. It isn't their 30-year fixed-rate mortgages that are causing massive losses. This writer is using lies and emotional exaggerations to support his contention that these loans are bad. It is irresponsible journalism, and he should be ashamed.
Meanwhile, other wealthy nations–notably Canada–do without our kind of mortgages and yet somehow manage to have homeownership rates similar to ours. They do not pretend that there are risk-free ways to buy houses on credit.
Canadians also do not have a mortgage interest deduction, so people are strongly encouraged to pay off debt rather than endlessly add to it and service it. Also, the wise Canadians recently inflated their own housing bubble as people foolishly used low-interest mortgages to bid up prices. The author forgot to mention that.
Mr. Lawler then skewered one of the favorite arguments of those who assert that we need Fannie and Freddie–their ability to borrow money all over the world, drawing in foreigners’ savings to finance ever-larger McMansions (which then need to be filled with Asian gadgets and European gewgaws). But why exactly do we need all of that foreign investment in our mortgages? Mr. Lawler asked: “A good case can be made that we massively over-invest in housing.” Indeed, we might be better off investing any money foreigners lend us in something that would help us sell more of our goods and services to those foreigners so we can hope to pay them back one day.
All too soon, Mr. Lawler’s time was up, but he blurted one last revolutionary chant before resuming his role as a bland bureaucrat: “We can do with a lot less government involvement and still get what we want, just by making some fundamental changes.”
What fundamental changes would those be? The author obviously thinks one of these fundamental changes should be eliminating the 30-year fixed rate mortgage. I think he is a fool.
Loans for the purchase or refinance of residential real estate secured by a mortgage and recorded in the public record are limited by the following parameters based on the borrower’s documented income and general indebtedness and the appraised value of the property at the time of sale or refinance:
1. All payments must be calculated based on a 30-year fixed-rate conventionally-amortizing mortgage regardless of the loan program used. Negative amortization is not permitted.
2. The total debt-to-income ratio for the mortgage loan payment, taxes and insurance cannot exceed 28% of a borrower’s gross income.
3. The total debt-to-income of all debt obligations cannot exceed 36% of a borrower’s gross income.
4. The combined-loan-to-value of mortgage indebtedness cannot exceed 90% of the appraised value of the property or the purchase price, whichever value is smaller except in specially sanctioned government programs.
Any sums loaned in excess of these parameters do not need to be repaid by the borrower and no contractual provision is permitted that can be interpreted as limiting the borrower’s right to exercise this right, make the loan callable or otherwise abridge the mortgage agreement.
That is the kind of fundamental change we would live with.
Scheduled for auction 28 years after purchase
Family homes have historically been a great retirement savings vehicle because people were forced to save through the amortization on their loan. California owners in particular have had opportunity to fund their retirements from an influx of high wage earning buyers driving up home prices. Unfortunately, with the Great Housing Bubble, many owners extracted their retirement savings and spent it.
- Today's featured property was purchased on 7/12/1982 for about $400,000 based on the property tax records. The owners original financing is unknown, but it was likely an 80% loan with a 20% down payment.
- On 12/11/2001 they obtained a $600,000 first mortgage.
- On 2/4/2003 they refinanced with a $605,000 first mortgage.
- On 5/3/2004 they opened a $100,000 HELOC.
- On 3/28/2005 they refinanced with a $743,000 first mortgage.
- Here is where it gets strange; on 4/3/2007 the refinanced with a $600,000 first mortgage which required them to pay down the first by $143,000.
- Total property debt is $600,000.
- Total mortgage equity withdrawal is about $200,000.
According to Foreclosure Radar, these owners defaulted in April, and they are scheduled for auction in August. Since they have about $600,000 in equity, it is safe to assume they will sell prior to their auction or get a loan modification. It may be this is an unemployment problem. For whatever the reason, these owners are being compelled to sell a house they have been living in for almost 30 years under threat of foreclosure.
Twenty-eight years after purchase, and their mortgage has doubled, and they are about to lose their homes. Very foolish, and very sad.
Irvine Home Address … 28 COLDBROOK Irvine, CA 92604
Resale Home Price … $1,199,000
Home Purchase Price … $400,000
Home Purchase Date …. 7/12/1982
Net Gain (Loss) ………. $727,060
Percent Change ………. 181.8%
Annual Appreciation … 4.0%
Cost of Ownership
$1,199,000 ………. Asking Price
$239,800 ………. 20% Down Conventional
4.80% …………… Mortgage Interest Rate
$959,200 ………. 30-Year Mortgage
$242,643 ………. Income Requirement
$5,033 ………. Monthly Mortgage Payment
$1039 ………. Property Tax
$0 ………. Special Taxes and Levies (Mello Roos)
$100 ………. Homeowners Insurance
$73 ………. Homeowners Association Fees
$6,245 ………. Monthly Cash Outlays
-$1365 ………. Tax Savings (% of Interest and Property Tax)
-$1196 ………. Equity Hidden in Payment
$440 ………. Lost Income to Down Payment (net of taxes)
$150 ………. Maintenance and Replacement Reserves
$4,273 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$11,990 ………. Furnishing and Move In @1%
$11,990 ………. Closing Costs @1%
$9,592 ………… Interest Points @1% of Loan
$239,800 ………. Down Payment
$273,372 ………. Total Cash Costs
$65,500 ………… Emergency Cash Reserves
$338,872 ………. Total Savings Needed
Property Details for 28 COLDBROOK Irvine, CA 92604
Baths: 3 full 1 part baths
Home size: 3,600 sq ft
($333 / sq ft)
Lot Size: 5,665 sq ft
Year Built: 1980
Days on Market: 60
Listing Updated: 40343
MLS Number: S613788
Property Type: Single Family, Residential
According to the listing agent, this listing may be a pre-foreclosure or short sale.
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