By Dr. Rent
The Daily Herald recently ran an article indicating that sub-prime mortgages are leading to foreclosures. That is only partially true, there is a larger cause.
I am probably in the courthouse more often than our wonderful moderator Bill is in the library. When I am at the process server window, I often go through the foreclosure notices. Our company is always on the lookout for a good value, and if you understand the foreclosure process, you sometimes get lucky. Lately two trends are painfully obvious. The number of Marathon County foreclosures is higher than I can remember them being, and the dollar values of the judgments are almost always well more than what the house is worth.
I believe that a contributing factor to foreclosures… the root cause… is the overwhelming emphasis that is put on the importance of home ownership. Every one is pushing it. The government at all levels believe that home ownership should be the ultimate goal of every American household, and until you have obtained that goal, you have not succeeded. Hey, who made up that rule?
I will be the first to admit that because I am a landlord, that of course I am going to see the importance of rental properties. However, I will not say that rental housing is more important than owner-occupied housing. I will however say that it is JUST as important.
Home ownership is not for everyone. There is a reason you need 20% down payment and a stable work and credit history before you qualify for what is known as a “conventional” mortgage. These requirements demonstrate not only an ability to pay the loan payments, but also an ability to save and budget (saving a 20% down payment is quite the feat today).
I can only sit in disbelief when I read that the Federal Government is considering some type of “bail out” program because of the high foreclosure rate caused by sub-prime lending and other “creative financing” scenarios. The government blames sub-prime loans, yet they also propose loan packages that require as little as zero down. Don’t they realize they are contributing to the problem?
Good, hard working people are convinced that they are nothing until they become home owners. So as soon as they get the chance, through a sub-prime loan requiring very little down payment, and with monthly payments that may need to negatively amortize the loan just to be affordable, they purchase homes. Of course, they can probably not afford the median priced newer construction at well over $150,000 in the Wausau area, and are probably finding themselves in a home 50+ years old for under $100,000. A water heater dies and its $500 (a mortgage payment is missed). A furnace dies and it’s easily $1,500 and a bunch of payments are missed.
That equity they had built up in the home? That’s not there. The down payment would have been the equity, but with no or little down… there is no or little equity. A conventional mortgage with a stable housing market still requires 5 years to build enough equity in the house to sell it without loosing money. However, the last few years have seen property values increase at rates that rivaled stocks. This opened the door for some of these sub-prime loans. People believed that its okay that they weren’t paying down on principle, the house would appreciate 10-15% per year building equity that way.
Well… it doesn’t work that way. The only way to solve the foreclosures is to stop putting so much emphasis on home ownership. What’s wrong with renting until you are in a position to purchase? Is it really wise for the government to be exploring a federally funded zero-money down program while cutting funds for rental assistance such as Section 8?
Yes, sub-prime lenders are a big factor in the current foreclosure crisis, however it is the government and our society who have created the perfect climate for sub-primes to get out of control.