patrick.net

Austinhousingbubble says

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.

Let's look at some hard numbers. Let us say for example that I had the 20% downpayment and the wherewithall to comfortably afford a $250,000 house. But the problem is that I would rather have the $400,000 house.

If I take the 3.5% route, I could put 14 grand on the house plus whatever other closing costs there were. I am not sure what that dollar amount should be. This would leave me thirty some grand or so to pay mortgage/rent on my house for a few years. And if I took the government's 8 grand. I could get the 400 grand house for 6 grand. and have 40 some grand to pay mortgage/rent on the house.

My question is whether the government is giving me a compelling financial argument to overpay on a house since I can always walk away if the market goes south? In fact I think it highly likely that housing prices will drop even with the government pumping all this money into the housing market.

If there is any hope of appreciation in the next several years, it seems like there is a strong case to buy too much house.

In fact is the government giving me a compelling financial case to buy a house at all--even the $250,000 house. Of course, this is assuming that without all the government giveaways both these houses are way overpriced? My question is whether it makes sense to buy a house that costs too much with all the government giveaways? Do I at least have the math right?

And I do not really care about your moral arguments. When it comes to money if it is legal it is moral.

Everyone if forgetting that when you take FHA loan out they stick you with an upfront fee (that they tack onto your loan amount) which can be quite hefty AND they require PMI payments ontop. So they probably allow people to get into the homes they want, but do not necessarily make a really good deal - what is everyone's take on the additional fees?

AHB,
How is a contract between two companies different than a contract between an individual and a company? I can't follow the mental gymnastics you are doing here.

Target just announced they will break a contract with a developer to build some new stores because the math changed to the point that the penalties incurred by breaking the contract were less than the losses had they gone ahead with the project. Should Target's mgmt be horse-whipped? On the contrary, they are protecting their investors.

Same thing goes for a family. You think it would be better for a family to continue making crippling mortgage payments when that money could be used to fund other things? What if with two incomes they could comfortably make their payment and fund savings, kid's education, etc. and then one person loses their job? They can still pay their mortgage on one salary but other things get pinched (savings, kid's education, etc.). If they could rent for a lot less than their mortgage, those people should be horse-whipped for NOT walking away and sacrificing their savings and kid's education.

If you loan money to a friend, you do have an ethical/moral obligation to pay them back. But in a contract between strangers (the bank and/or govt is NOT your friend) you should protect yourself in case the other side breaks the contract. You won't be in business long if you don't.

The bottom line is that the contract says pay x dollars or give back the house. End of discussion. Neither Option A or B is better or worse than the other.

Also, the fact that taxpayers are bailing out the banks has NOTHING to do with my argument. I think any bank should be allowed to fail if they make too many bad loans.

As for FHA, I don't believe the govt should be in the mortgage business but since they are, they should require PMI if the down payment is small which will protect them in case the person defaults.

How is a contract between two companies different than a contract between an individual and a company? I can’t follow the mental gymnastics you are doing here.

Limber up! When a company goes afoul, it doesn't mean future tax liabilities to the public. Even if there was a swell of local/corporate businesses that tanked over the next year, (and there already is) it has no adverse effect on the taxpayer, other than local unemployment numbers.

Should Target’s mgmt be horse-whipped? On the contrary, they are protecting their investors.

Target probably should be horsewhipped. But the point is, they are not protecting their investors at the expense of the taxpayer.

Same thing goes for a family. You think it would be better for a family to continue making crippling mortgage payments when that money could be used to fund other things?

You keep changing the context of your argument. I'm not referring to financial cripples. I used the example of a fat cat who can just as easily afford his mortgage payment as he could at the outset, but has now decided to walk away because the market has tanked and it doesn't suit him to have overpaid. It's a logistical maneuver, sure, and I can appreciate it on paper, but he's still a POS. He shouldn't have bought in the first place, but thanks to the propaganda that shirking one's debts doesn't make you a deadbeat, he's all but vindicated. The real shits, though, are these shameless buyers taking out FHA mortgages with the idea of "I can always just walk away." I think this slimy self-interested lack of shame will have a ruinous effect on an already battered landscape. I don't want to plunk good money down to live in a neighborhood full of fly-by-night types who have one foot out the door if things get shaky.

If you loan money to a friend, you do have an ethical/moral obligation to pay them back. But in a contract between strangers (the bank and/or govt is NOT your friend) you should protect yourself in case the other side breaks the contract. You won’t be in business long if you don’t.

This is the conundrum, because strictly speaking, you and your friends ARE the government. This land is your land, this land is my land...you know the jig.

>Also, the fact that taxpayers are bailing out the banks has NOTHING to do with my argument. I think any bank should be allowed to fail if they make too many bad loans.

Bullshit. You may prefer if it didn't but there's no decoupling the tremendous future burden to taxpayers from home-buyers who knowingly bite off more than they can chew only to jump ship when the clouds roll in. If this burden doesn't come in the form of FHA loan defaults insured by taxpayer dollars, it comes from bank bailouts for conventional loan defaults. It all comes back to you and me. If you want something to be pissed off about, maybe try this on for size.

As for FHA, I don’t believe the govt should be in the mortgage business

We agree on one thing. Almost. I don't mind them being in the mortgage business, but not to the degree that they are; where the guy who can maybe afford a 250K house in Ohio now thinks overextending himself to afford a 400K house would be better. He can always walk away...no shame.

ut since they are, they should require PMI if the down payment is small which will protect them in case the person defaults

They do require PMI, but it's hardly a safeguard from defaults. Look around. What's needed are recourse loans, like they have on government refinanced loans.

And I do not really care about your moral arguments. When it comes to money if it is legal it is moral.

They aren't my moral arguments. Principle is not subjective from individual to individual. Kinda like Magnetic North. If money and contractual legalese hold sway over your own personal judgment, that's your lot. Good luck.

Austinhousingbubble says

And I do not really care about your moral arguments. When it comes to money if it is legal it is moral.
They aren’t my moral arguments. Principle is not subjective from individual to individual. Kinda like Magnetic North. If money and contractual legalese hold sway over your own personal judgment, that’s your lot. Good luck.

Whose moral arguments are they?

Whose moral arguments are they?

I don't have a proprietary ideal of morality that I'm trying to argue. You don't need to be a full-on absolutist to realize that on some level there are absolutes when it comes to right & wrong, regardless of context, statutes, loopholes, popular opinion, etc.

AHB,

I think you're getting your panties in a wad over what amounts to a very small number of people in the long run. I don't have any data but my contention is that the vast majority of folks who are walking away have little choice. They are financially unable to stay in their house without potentially damaging sacrifices and they have the emotional fortitude to walk away before the Sheriff kicks them out. Most people I've read about have some ridiculous emotional attachment to "their" house and they don't want to lose "their" house so will burn through their savings and rack up tons of credit card debt trying to make a mortgage payment they can't afford. They should have walked away before that point because now instead of just a foreclosure they're looking at a full-on bankruptcy.

I just don't think there are tons of these so-called "fat cats" of which you speak that are simply screwing the bank/govt. If so I'd love to see some actual data.

My panties are fine - I just find it disconcerting that you and people like you are feeding into this much maligned propaganda that it's cool to go out and get in over your head and then walk away, because, hey, it's the bank's lot, and fuck the banks. If this were the case, I would agree; I would buy twenty houses just to stick it to the banks. But, for the last time, it DOES NOT hurt the banks - they pass those debts onto you and me and the next generation, who will likely and rightfully revile this one for it's addiction to both consumer debt and government largess.

As for Fat Cats - there have been quite a few articles recently reporting on preemptive prime mortgage defaults out of self-interest rather than necessity - the fat cats I referred to. Do a Google search. I think Patrick.net even showcased an article or two in the recent past. It's not some phantom menace, and it will result in future tax burdens. On top of that, there are also plenty of people I know of personally who are stretching themselves thin to take advantage of FHA and other tax funded incentives for buying above their station who are one or two hiccups away from default in the coming years.

Here's some interesting news from the AP...

http://www.google.com/hostednews/ap/article/ALeqM5jYs8k4cz398yrVYLt3QxLvIURD9wD99OF1M02

"...the FHA became the main source of home loans to borrowers with poor credit and low down payments after the collapse of the subprime lending market."

"The FHA currently backs a 1/3 of new home loans, up from about 3% in 2006"

"Cutting out 25% of available mortgages would be a disaster, decimating the market and hurting millions of prospective homeowners."