patrick.net

I don't see any reason to be heaping scorn on the 3% down payment at all. Here is my take - To the extent that they are first time home buyers who qualify based on documented income and the criteria of a monthly payment being between 30% - 38% of their household income and the loan is NOT an interest only loan, I would think that it would be acceptable, given the low home prices at this time, which are expected to recover in the next 5 years. Now is the time to encourage all those exotic financing schemes really and NOT when the home prices start to go up! All those exotic financing schemes should be choked off as prices start moving up and they go above the historic Household income-Home price co-relation trend levels!

uslawman says

the ability of my wife to stay at home and avoid child care, reduction or the $10k + 3K I pay a year in property taxes and HA diues…and a few other things like the answer to why my utilities bill is $450+ a month even though I have an “energy-efficient” new home.

It seems like those items were choices. You could have had the stay-at-home wife, etc, if you chose a more modest lifestyle. Sounds like you live in an upscale house, which brings the high taxes/HA fees, which altogether requires two incomes to pay for.

Kevin says

You start saving when you’re 20 and by the time you’re 65 or 70 that money has grown substantially — even today, the single best “safe” investment that you could have made 20,30,40, or 50 years ago was an S&P index fund.

That's actually not a true statement:
http://globaleconomicanalysis.blogspot.com/2009/06/long-term-buy-and-hold-is-still-bad.html

I have a question. I know there is a big focus on the FHA loans, but I was wondering what thoughts everybody has on the VA loans that don't require any downpayments. Do you feel that these are the same or worse than FHA loans that only require 3% down? I just ask because we recently used one to buy our first home and wonder if users of the VA are perceived the same as FHA users. We weren't able to save a down payment because when we moved to the area we currently live in (my husband's job required that we move 3 years ago), we had another home that we could not sell (and have yet to sell at this point) and had to make payments on for 3 years, in addition to the rent we paid for the places we actually lived in- in actuality, the other property is in my in-law's name and we were going to buy it from them once we got settled- it was their way of helping us get started. However, my husband got a great job offer that required us to move and when my in laws put it up for sale, they priced it too high and we were never able to sell it. This was a big bone of contention for me as I felt that we lost our chance to get rid of the place and basically chased the market down, but we have a moral responsibility to hold up our end of the deal and not leave them to make the payments or ruin their credit by defaulting. We were going to just rent a house as we outgrew apartment living, but the cost of renting a house for us would be several hundred dollars a month more than paying PITI. By the time we closed escrow in May, we finally got renters in our other property and now have the extra cash to put towards the principal on our mortgage if we want. I do understand the point of saving up and putting down 20% and what it might suggest about how risky a buyer is when they are unable to do that. But for our situation, we plan to stay in the house and raise our family, and my husband has a very secure job where he gets annual COL raises in addition to step pay increases. Also, while his coworkers were purchasing brand new houses over double (sometimes triple) what we paid, we opted to buy a foreclosure that cost us only 1.7 times his annual salary. We could have waited to save up the downpayment since we finally got our other property rented, but we were tired of moving from rental to rental as our family grew and wanted to finally settle. We just made sure we didn't over extend ourselves and bought a house with a payment (PITI) that would still keep our overall debt to income ratio below 25%. I know we are probably not in the majority of home buyers right now, but I don't feel like not having the 20% necessarily means we are not ready or responsible enough to buy. I am curious though on what thoughts everybody has on the VA loans and whether they should be offered or not. Cheers!

Totally agree. I noticed this in April: FHA is the new subprime.

Kevin says

StillLooking says

So putting more money on a mortgage is clearly better than putting the money in a savings account or even buying a CD. And anywhere else you put money entails risk.

Bonds (corporate or government) will beat both the savings and CDs and have similar (i.e. near zero) risk.
As far as “clearly better” — how? It seems like almost a guarantee that housing will continue to go down. If you only put 3% down, you only have 3% to lose, whereas if you put 20% down, you have 20% to lose. How is that less risky than the stock market, commodities, investing in a startup, or starting your own business?

If the Federal Reserve tomorrow decides to raise interest rates all these investments can sour very quickly.

I am not saying that buying a house is at all a good investment as housing is clearly way way overpriced. My point is that if you have already made that bad investment putting more money into your mortgage is sound financially. Except of course if you want to walk away.

What I find "bad" about VA loans is two fold:

They raise house prices near military bases

They encourage military to buy when they should rent

When I was in the Air Force, I knew quite a few folks who were stationed at one base while having an unsold home at thier last assignment. Oddly enough, those who couldn't sell the old house buy again at the new assignment. Multiple house payments was almost a proverb. Even though folks knew they would only be on station 3 years, and despite the experience of bringing a checkbook to the closings of old homes that eventually did sell, they still buy.

Texas requires a 20% down payment of its banks and the state neither experienced the full extent of the housing bubble nor will it suffer the same level bank failures and foreclosures.

I don't know where you got that from, but it is inaccurate. 20% is not mandated here, and income v. price was not an issue with many local lenders, either.

We put down 25% (more, actually) on our house in 04. It’s all gone today, plus about 15% more (and still dropping). When we get kicked out of this place (sometime around 2011, I’m guessing), and after the “cleansing” period of 5 years (probably less, as I’m guessing there will be a Great Credit Amnesty, not so much to help us as the banks) I will never put down more than the bare-ass minimum again. If I buy. Not too sure about that either.

With all due respect, the problem has less to do with what you put down, and everything to do with having purchased an overpriced house during the hysteria. The right move would have been to rent.

That said, if you can afford to, why not sit tight? The home is still affording you the same amount of shelter it did when you purchased it.

For example, if you're tired of driving someone else's car, and you decide to buy your own car, for say, 15K putting 5K down - well within your means - only to discover that the car is worth only $8000 eighteen months later, do you walk away from the car if you can still afford it? It still serves its purpose as a means of transport. I know this isn't a perfect analogy, but I do think that people see homes more as an investment than an expense. It is a very useful and expensive apparatus for living. That's about it.

20% sounds fair, I’ll agree to that. Just a few things first, I’d also like to see a return of my: pension plan, career security, my last job returned from India, full employer-provided health & dental insurance, elimination of the 5 “pre-tax” funding deductions on my pay-check, the ability of my wife to stay at home and avoid child care, reduction or the $10k + 3K I pay a year in property taxes and HA diues…and a few other things like the answer to why my utilities bill is $450+ a month even though I have an “energy-efficient” new home.
The pont is: everything has changed. The average guy’s financial condition and security has been under attack from every conceivable direction, to go back to a 20% mentality and ignore everything else is intellecutally dishonest and talk show silliness.

I understand your stance on overall diminishing returns. However, this is really not a very good argument for moving the goal posts. You would be more able to swing 20% if the prices weren't pegged as they are, for these minimum down grub stake loans. If you still could not, you would rent and save.

I don’t see any reason to be heaping scorn on the 3% down payment at all. Here is my take - To the extent that they are first time home buyers who qualify based on documented income and the criteria of a monthly payment being between 30% - 38% of their household income and the loan is NOT an interest only loan, I would think that it would be acceptable, given the low home prices at this time, which are expected to recover in the next 5 years. Now is the time to encourage all those exotic financing schemes really and NOT when the home prices start to go up! All those exotic financing schemes should be choked off as prices start moving up and they go above the historic Household income-Home price co-relation trend levels!

It's not so much scorn, as dismay. Meanwhile, your supplied logic is errant, as the criteria is not a stringent as the one you've put forth. Example: one guy I know is in-between jobs as he pays on escrow toward that 3% down. The property is also priced well over 3Xs their annual income. FHA is designed to make it easier for riskier buyers to get a loan. It almost proclaims it's laxness as its #1 benefit. Also, I can supply plenty of examples of houses that are still overpriced by margins of 20 and 30%, including many in the hotbeds of the bubble era.

m1ckey6 says

Gotta love the Kevin’s of this world. Sneering certainty in financial matters is a sure fire guarantee the speaker has no idea what they are talking about.

Despite the absurdity of claiming a positive return from Vanguard small cap investment’s since late 2007 I do - unfortunately for Kevin - know where the market was 40 years ago.

The S&P was at 99.61 in July 1961. Adjusting for inflation using BLS data we get 585.43. Today we are at 943.72 which is a 1.2% compound rate of return.

Aside from the fact that the compound return rate dropped over three points due to last year alone, you're ignoring the 3-5% dividend yield.

The funny thing about last year's drop is that it is the third drop of such a size in 100 years, the other two being 1974 and 1934. In both of those cases the losses eventually turned into a blip on the radar. Depending on when you pick your numbers, the annualized return rate can easily go from -6% (the last 10 years) to 14% (the 1990s).

10 years from now, the annualized return on growth alone will measure 5-6% again, adjusted for inflation, and there will still be 3% dividend yields on top of that.

You are being lied to by your “financial advisor”. Vanguard’s small cap ETF VB is down 37% since you said you bought it. This means you need a further rally of 59% simply to break even.
Most people struggle with basic math which is why Wall Street pulls so much money out of people’s pockets every year. Kevin is the classic type that “wins” $1,000 when he visits Vegas but forgets to mention that he started with $2,000.

I bought the fund in January, not in late 2007. 2007 is when I converted everything to bonds. The bond funds were worth a little under $30k in december 2007, and a little over that in January 2009 when i sold and converted back to stocks. The account currently stands at a value of a little over $40k.

But clearly they focused on math instead of reading comprehension at your school.

Misstrial says

Anyway: PLEASE LET US ALL KNOW where we can get 8-10 percent in this market of programmed trading and manipulation. Not even the hedgies are getting those rates of return in this enviro and Madoff was the one who consistently gave 10 percent returns even in down markets. So, I’m wondering who are you with??? Thanks!

Madoff

Kevin said:

"I bought the fund in January, not in late 2007. 2007 is when I converted everything to bonds. The bond funds were worth a little under $30k in december 2007, and a little over that in January 2009 when i sold and converted back to stocks. The account currently stands at a value of a little over $40k.

But clearly they focused on math instead of reading comprehension at your school."

Not to be flippant Kevin but I'm not sure it even matters to have an opinion on financial matters if your savings are $40k. If you are 21 then congrats but ROI on this amount is a little like being the best at pedal car racing - irrelevant.
Once you get an amount that is more than a years dedicated savings lets have a discussion about strategy.

Austinhousingbubble says

The property is also priced well over 3Xs their annual income. FHA is designed to make it easier for riskier buyers to get a loan. It almost proclaims it’s laxness as its #1 benefit. Also, I can supply plenty of examples of houses that are still overpriced by margins of 20 and 30%, including many in the hotbeds of the bubble era.

I don't think FHA is considering 3X Annual Income. They maybe considering only if the monthly payment is within the band of 31% - 38% of their monthly income. I see no reason why riskier buyers should not be given a loan.

I think right now its a dumb idea to put any money down. If you need to dump money to lower your payment you probably can't afford the house (remember when a person's income determined what house they bought?), and in this kind of a market I'd be looking to float the whole loan, thereby making it SOOO much easier when I had to walk away 5 years from now when it had dropped another 50%.

whitneyross says

Texas requires a 20% down payment of its banks and the state neither experienced the full extent of the housing bubble nor will it suffer the same level bank failures and foreclosures.

As a person who bought a home in Texas in 2008 using only a 10% down payment, I can definitely say that this statement of yours is pure BS. The reason Texas did not experience the Housing bubble is due to the easy Home Building regulations (or rather Non-regulations) that allows unrestricted building of homes, so there is plenty of supply ALWAYS!

If you need to dump money to lower your payment you probably can’t afford the house (remember when a person’s income determined what house they bought?), and in this kind of a market I’d be looking to float the whole loan, thereby making it SOOO much easier when I had to walk away 5 years from now when it had dropped another 50%.

It's not about needing to, it's about wanting to -- as in wanting a shorter stint over the barrel. If you could buy a house, (at fair market value - meaning not RIGHT NOW) and pay it off completely, why wouldn't you? So you can nickel & dime yourself for the next 20 - 30 years while playing grab ass in the stock market, only to lose a nice chunk during the next crash - which might just be nicely timed to coincide with your autumn years, as it was with many friends I know. Also, with a vastly diminished monthly/yearly overhead along with any pay raises/promotions you may enjoy now in your prime earning years, you have that much more spending power for investments.
As for going into a deal with the idea of walking away -- if that 'fuck-it' attitude takes hold, it iis going to destroy the landscape. It will be what this generation is reviled for thirty years hence, much as the baby boomers are for their materialism. If there's even a shadow of a doubt in your mind that you might 'walk away' you should be horse-whipped for even thinking of buying. It's like getting married to a woman who you might not be totally in love with, with divorce somewhere in the back of your mind on your big day.
And frankly, who wants to live in a neighborhood full of people who feel so flippant about their residences? Sounds like trouble to me.

Texas is not a “walk away” state … and THAT, along with strick rules for lending to non-Americans, is why there was not as bad of a bubble. Lets all be open and honest as we go - k?

IF by not a "walk away" state, you mean you can't mail in your keys and go live with mom & dad, I think you're wrong. There are non-recourse loans here in Texas, too. Check it out:
http://www.foreclosure.com/statelaw_TX.html

AHB, I dont think many truly understand what is going to happen to these recently developed regions.

It's true; or rather, they have at least some idea of what's brewing, (given recent events, and the law of averages, how could you not?), but cognitive dissonance and 3% down emboldens their bad decision making.

It's like being at the store with a grocery list, then realizing you don't have your wallet on you, and deciding to go about filling up your cart all the same - because you're already there, dammit, and you have all these great coupons in your pocket.

Texas also has relatively higher property taxes than California (as well as no Prop 13-type caps). This also contributes to the relatively smaller bubble (or non-bubble) in Texas than California.

If by non-bubble, you mean no hyper-appreciation, (70-100% in four years in some areas) you are dead wrong. At least in Central TX. The numbers don't lie.

About the TX thing and VA loans, I know quite a bit. Rental property in Dallas and just sold in Corpus Christi.
The 20 percent thing is probably the rule about home equity loans. You cannot borrow beyond the 80 percent LTV, that is you must leave 20 percent equity in your home if you take out a home equity loan.
The canal homes on North Padre Island have been pummeled by almost 40-50 percent from highs in 2006-2007.
We sold in Jan of 2009 and of five other people at my wife's place of employment--a hospital--none have had any luck selling for the past six months. We were the last ones to "get out." Prices, especially in the more exclusive areas, have been pummeled by more than 20-30 percent from the highs of 2005. This is TX where there was no "bubble." Our builder went out of business almost two years ago and is now tending a bar. We had a dry lot on North Padre and just barely avoided a loss.
My father recently viewed a few area homes and a listing agent, who insisted that the home was correctly valued, bemoaned "if only there were more buyers." Of course she must also know that price has no relation to supply and demand. We have friends, listing their elegant home aggressively 50k below market (yes, below comparables in their neighborhood), which is almost 100k less than the purchase price in early 2006, with no takers for months. And they need to sell asap. Roughly a 350k house now for 250k. If it's desperate in TX, it's desperate.
Check out the sanguine perspective of this local real estate agent from Corpus Christi. She avers that home prices will pick up by Dec. 2009. I can assure you that there is so much available inventory in that market, there is no chance that the 8k home stimulus will do squat, especially at the middle to higher end. If Corpus Christi, as she contends, has one of the strongest housing markets in the country, then we can extrapolate from there: down.
http://www.donnanell.com/
Speaking of VA loans. We had two offers on our house--all of our neighbors with homes to sell were astonished...one was a VA loan offer that was tweaked very much in favor of buyer...yes VA always favors to protect buyer but you can hide additional fees for seller to pay by using and open clause for unspecified expenses. VA loans need to be written well to at all be competitive to conventional. we took the latter.
We will use VA in future, especially in military community with streamline refinance and assumable loan rate.
I'll just add two other bits. Why did our house sell? We listed it with a flat fee agency for 299 and 3 percent to buyer agent on MLS. Their buyers agent was a guru. The other agent was an ESL sap plus VA. Always deal with the agent who you think can get the deal done. He talked them right in, especially with a second "competing" offer. I believe the buyer had to add a few k bc of lower appraisal btw. BAgent asks me when deal is done, so how much did you pay for listing..."299" and his mouth dropped. Gotcha. Had we paid listing fee, we would have made almost nothing.

The bigger issue is why in the world are tax payers taking the risk of originating these 3% down payment loans? There are two scenarios: 1) Buyer could make a bigger down payment, chooses not to do so. In this case, the taxpayers are just funding the buyer’s chase of higher investment returns. 2) Buyer can barely make the 3% down payment. This is scary - what happens when the house needs a new water heater or roof…basically the .gov is lending to people 2 paychecks away from default. I think scenario 2 likely accounts for a majority of FHA buyers and nothing would please me more than to see the down payment requirement raised to 8-10% and a premium charged to buyers in non-recourse states.

Alas you are probably right in your assessment that most fall under option 2, however I as a potential buyer fall into category 1 because of your concern as stated in option 3.

(If I ever get to the point where) I could put 20% down, I would have no money in reserve in the event I have an emergency repair, loose a job, get ill, etc. So, I will choose to put 3.5% down, and keep the cash in the bank for emergencies.

Also, it depends on the market you are in. Saving 20% on a 150k house will take less time than saving 20% on a $400k house, even when you adjust for incomes and other cost of living factors.

As far as my own personal situation, typical house is $350k. 20% is $60k plus another $10k in closing costs. So I would need $70k in the bank just to buy applying the 20% rule of thumb.

EastCoastBubbleBoy says

1) Buyer could make a bigger down payment, chooses not to do so. In this case, the taxpayers are just funding the buyer’s chase of higher investment returns.

or:

Buyer is merely able to spend more on a home, even if not financialy prudent. The idea that the average homeowner can invest at higher return than his mortgage payment is a figment of the imagination of the homeowner and his "financial advisor."

No, not a troll.

I need to qualify my statement about %26 return, its more:

1) I am lock in employee stock purchase plan that, as of Friday, is yielding 60%.
2) I gambled my wife's 401k early this year, split it between 3 stocks, and doubled it.

I realize this isn't sustainable and some dumb luck, but right now my investments are paying. My point is why is it necessary to put 20% down if I don't have to and do not over extend?

Austinhousingbubble says

If there’s even a shadow of a doubt in your mind that you might ‘walk away’ you should be horse-whipped for even thinking of buying. It’s like getting married to a woman who you might not be totally in love with, with divorce somewhere in the back of your mind on your big day.

This is complete and utter BS. And it's thinking like this that is creating legions of debt slaves. Buying a house is a BUSINESS transaction. You do NOT have a moral obligation to pay your mortgage. It says right there in the contract (that was signed by both you and the bank) that you agree to pay the bank the money back OR they get to keep the house. It's a cut and dry BUSINESS decision. You and the bank are entering into a contract w/ both eyes open and both agree to its terms. And if you stop paying and give back the house you are not in fact breaking the contract - you are simply exercising the alternative payment option.

On the marriage front I have two things to say. First, the "contract" you enter into (your vows) typically say you'll stay with that person forever no matter what until you die. So if you do break up you're in effect breaking the contract (unlike the above). Second, for most people, marriage is in fact a moral obligation and so breaking it has moral consequences.

Disclaimer: I am neither pro nor con divorce and pass no judgements on anyone for their personal decisions.

You do NOT have a moral obligation to pay your mortgage. It says right there in the contract (that was signed by both you and the bank) that you agree to pay the bank the money back OR they get to keep the house.

In a non-recourse mortgage loan, this may be true, but recourse loans are worded in order to circumvent the very evasion that you promote as sound business logic.

It’s a cut and dry BUSINESS ...

Kinda like what a hitman says to his mark before he lets him have it. You draw a much thinner dividing-line between personal morality and business ethics than I do, and while it probably looks sensible on paper, the two are not oranges and apples. Your attitude has ramifications that go beyond self interests and financial acuity. We're not talking about late fees at the video store, or letting the repo man have your car.

I realize I am wasting my breath and that your mind is made up to disagree, but let's at least be clear about what we disagree on. There are, of course, unique and extreme instances where defaulting on a loan is the only realistic option. I am not being dogmatic and suggesting you drive your car off a bridge because you made some bad decisions in life that led to excessive debt and/or inability to honor said debt.

That said, these are not the instances to which I refer. According to your purview, it's not only acceptable to make bad financial decisions and go knowingly into a major purchase like a house with machinations of fucking-off if you decide at some point that your obligations are no longer in your best interest - even if you can still afford them as easily as you could when you first assumed them - it's just cut and dry business. That business model sucks in its own way, but ESPECIALLY with tax-payers (your neighbor) on the hook in the case of FHA guaranteed loans. That's what burns, and I put it to you that this will lead to both blight within our communities as well as within the human spirit - whatever's left of it. I doubt you're being completely sincere when you say this is utter bullshit. It simply is not. What is, however, is the relativist attitude that's emerging from the ashes of our stagnant economy.

Meanwhile, marriage IS a contract, and what is more, it is NOT necessary to validate one's vows to another person with a state license/contract. My best friend has been with the same woman for nearly 16 years, with no marriage plans. I guess you could call them responsible RENTERS. At least two other people I know are on marriage #2 before the age of 30, with an eye out for #3 and probably #4 after that. How is this so vastly unique from the mindset mentioned above?

http://barefootmailmen.blogspot.com/2009/07/fha-mortgages-next-bubble.html

I guess I was hoping that the nation might have emerged from this latest speculative mania with a sense of clarity and humility. Maybe even a renewed grasp of certain fundamentals when it comes to things like personal values and basic econ. Instead, I am sensing a vast sigh of relief that there is still someone there to feed you some cards under the table, after all - in this case, Uncle Sam.

...by the way, I contend what creates legions of debt slaves is the smash 'n' grab-gotta-have-it-now-on-the-installment-plan-consumerist attitude. That is to say, the problem is irresponsible debt - not honoring one's debt.

Austinhousingbubble,

Excellent posts.

Austinhousingbubble says

Kinda like what a hitman says to his mark before he lets him have it. You draw a much thinner dividing-line between personal morality and business ethics than I do, and while it probably looks sensible on paper, the two are not oranges and apples. Your attitude has ramifications that go beyond self interests and financial acuity. We’re not talking about late fees at the video store, or letting the repo man have your car.

Uh, dude you're off your rocker. Killing someone is ILLEGAL. Defaulting on a mortgage is not.

What possible ramifications does my thinking have? If the bank had 2 brain cells to rub together they should not have made an $800,000 loan on a 1,000 sq ft house. But they agreed to the terms of the loan so if one party decides to stop paying and give up the house (per the terms of the contract) the bank simply takes it back. It is the BANK'S fault that the house isn't worth $800,000 any more. They should have to eat that loss (not the taxpayers). If they can't eat the loss then they should go out of business to give room for other banks who were not so reckless.

Do you know that companies break contracts all the time? If they decide that the penalties incurred by breaking the contract are better than continuing with the contract that's what they do. It's up to the counter-party to write the contract such that if one side breaks the contract they'll still be ok. This stuff happens literally EVERY DAY and the world hasn't come to an end. So take your faux morality some place else.

Austinhousingbubble says

…by the way, I contend what creates legions of debt slaves is the smash ‘n’ grab-gotta-have-it-now-on-the-installment-plan-consumerist attitude. That is to say, the problem is irresponsible debt - not honoring one’s debt.

Oh believe me, I don't feel sorry for these people who got in over their heads. If they can't pay their mortgage they should be out on the street. But you can't fault someone for realizing their mistake and taking corrective action which could mean defaulting even when they still have the ability to pay. Why should someone keep paying on a $600k mortgage when the house next door is selling for $300k? They take their lumps (bad credit for a few years) and the bank takes theirs (the house).

grywlfbg:

You have touched on an important point - and that is, what if lenders will not extend a home loan to those who have been recently (2005--->) foreclosed on or walked away?

There's a lot of borrowers who are assuming that everything will be OK in 7 or so years and that they will simply reapply for a loan to buy a house that is presently sold for 600k only to buy it (or something similar) for 300k or less.

WHAT IF lenders won't lend to these people. Maybe they will now or in the immediate past, but if the economy is in for a long, slow descent, who's to say that money will be available to borrowers with these sorts of backgrounds: walk-aways, foreclosed, jingle-mail types, etc.

Just a thought. Not sure that making assumptions based upon past policies will work in the future.

Misstrial says

You have touched on an important point - and that is, what if lenders will not extend a home loan to those who have been recently (2005—>) foreclosed on or walked away?

Well, that's certainly an option. If it comes to pass those people will simply be renters until such time that a bank will lend to them. But I'm quite sure that I would rather be a renter for life than have to pay off a $600k mortgage for a house that's only worth $300k. That's because I would likely be paying half or less of my mortgage in rent which means I'd have a dramatically higher quality of life than if I'd stayed in the mortgage.

But yeah, people need to weigh all possible consequences (I never said defaulting was a free lunch - just that it should be considered in a strictly financial context, not with faux morality heaped on.). However at this point it looks as if people's credit is recovering in 3-5 years after default.

So like what is the downside of putting 3.5% on a $400,000 house?

You lose fourteen grand and your credit is wrecked plus whatever other closing costs. IS that it?

OK, like what would be typical closing costs?

I am starting to think I am a sucker for not buying an "option" on a house. I would get to live in a nice house and if the market goes south, I just walk. Who knows if the government keeps printing money like they are doing the price might actually go up.

Obviously this is really a stupid deal for the government but why not take advantage?

Uh, dude you’re off your rocker. Killing someone is ILLEGAL. Defaulting on a mortgage is not.

Right. It was meant to be tongue in cheek, in opposition to the chip on your shoulder.

What possible ramifications does my thinking have?

I'll go ahead and assume this a genuine question and do my best to illuminate the obvious, although I think I already did that in my previous post.

As long as it remains etched into the popular mindset that entering into a deal with the clause somewhere in your mind that you will just walk away from your financial commitments, then we can all look forward to a future where "aw, fuck it" becomes the order of the day. If you really genuinely see nothing wrong with that portent, then something tells me you might be the ebay seller from the early days who took my money order but never sent the goods based on some subjective purview and the lack of a binding handwritten contract, or the waiter who treats customers like shit on the last day of your employment someplace because you are not required by law to treat them any other way, and because you have nothing to lose. Personally, I never want to conduct business with some one with that attitude. Just because you can, doesn't mean you should. Now repeat that twenty times. I think that home loans SHOULD contain some recourse, at least or especially in the case of FHA loans. Maybe they wouldn't be such a trivial matter then.

I hear people bellyaching all the time about having too many renters in Shrangri la. Seems to me that people who have no qualms about walking away from their place are just as much a detriment to communal solidarity as a renter with no real liability to the area - the difference being that, when a renter splits, you aren't on the hook for the balance of their lease, as you will be with FHA loan defaults. If that's cool with you, then you're right - no ramifications.

If the bank had 2 brain cells to rub together they should not have made an $800,000 loan on a 1,000 sq ft house. But they agreed to the terms of the loan so if one party decides to stop paying and give up the house (per the terms of the contract) the bank simply takes it back.

It is never that simple, as recent history has shown. It ends up hurting everybody BUT the banks, including the communities with a bunch of empty houses sitting around. As for the the banks, they're still making a fortune on derivatives, so you can't criticize their smarts too much. Lack of ethics, yes. As for the scenario where the bank simply takes it back - you're out of touch. That was yesterday's scenario. I'm referring to the FHA scenario, where defaults are projected to be just as high as the subprime loans from the heyday. Do a little research.

It is the BANK’S fault that the house isn’t worth $800,000 any more. They should have to eat that loss (not the taxpayers). If they can’t eat the loss then they should go out of business to give room for other banks who were not so reckless.

Well, yeah. But they won't. The public will. That's the whole point, I think. And no bank eats their losses, by the way. Einstein said nothing ever really goes away. This is esp. true of debt. Guess where it ends up?. MortgageNewsUSA just had a headline stating: Foreclosures are Often in Lender's Best Interest.

Do you know that companies break contracts all the time? If they decide that the penalties incurred by breaking the contract are better than continuing with the contract that’s what they do. It’s up to the counter-party to write the contract such that if one side breaks the contract they’ll still be ok. This stuff happens literally EVERY DAY and the world hasn’t come to an end.

This isn't a sane comparison. We aren't referring to companies, we are talking about individual transactions and taxpayers. Since when is the taxpayer on the hook when the local Tire Kingdom folds?

So take your faux morality some place else.

You really don't have to get shitty - we'll just agree to disagree on this one.

Obviously this is really a stupid deal for the government but why not take advantage?

This sounds like "if you can't beat 'em, join 'em." In hindsight it sounds something like "Everyone was doing it."

This illustrates the very mindset to which I referred.

Austinhousingbubble says

Obviously this is really a stupid deal for the government but why not take advantage?
This sounds like “if you can’t beat ‘em, join ‘em.” In hindsight it sounds something like “Everyone was doing it.”
This is the very mindset I referred to.

So if the government decides tomorrow to send everyone a million dollar check you won't cash yours due to some moral mindset?

I live in the Chicagoland area and asking prices for housing around here is outrageous compared to other cities, but perhaps the government is creating conditions where I would be a chump not to buy. Buying an option on a house for 3.5% seems pretty cheap to me.

Of course the government is acting very stupidly but I am started to worry that I am being played a fool not to take advantage.

What are the implications of purchasing an option on a house for 3.5%? Is it really that easy?

So if the government decides tomorrow to send everyone a million dollar check you won’t cash yours due to some moral mindset?

People always use this straw man argument or some variation on it. This is quite a different scenario from the one in discussion, but to answer your question, it depends on how Faustian the small print was, the strings attached, and how much would be coming out of Peter's pocket to pay Paul. If Peter is my father, brother, son, neighbor, friend, customer - then yes, there's a moral conflict. Besides all of this, it would mean that a millions dollars isn't worth a million dollars anymore, and so the premium of such a windfall would be all but totally undermined by the inflation that would then occur. Kinda like why house prices will stay artificially high, as long as there's cheap money available.

I live in the Chicagoland area and asking prices for housing around here is outrageous compared to other cities, but perhaps the government is creating conditions where I would be a chump not to buy. Buying an option on a house for 3.5% seems pretty cheap to me.

If you truly believe this, buy several.

Of course the government is acting very stupidly but I am started to worry that I am being played a fool not to take advantage.

I don't think it's at all abnormal to feel that kind of anxiety - it may even be part of the propaganda machine - but keep in mind, the government is...us!

What are the implications of purchasing an option on a house for 3.5%? Is it really that easy?

Depends. I can't speak to your personal situation, but it will keep prices artificially high in many areas, because the government is over incentivizing the purchase of a house with tax payer dollars. This in turn helps keep property taxes artificially high as well. It also means more taxes down the road as more of these loans default in the coming years.