Fri 22 Feb 2008
“I would freeze interest rates for five years. These adjustable rate mortgages, if they keep going up, millions of Americans will be homeless.” -Hillary Clinton
Whoa whoa whoa…what?
People that bought homes and chose an adjustable rate mortgage entered into an agreement. The short term benefit for the buyers was that they would be faced with a lower monthly payment. The long term loss was that the buyers would eventually be paying more money.
Banks chose to accept lower payments (short term loss) for higher payments in the future.
A welcher is someone who ’swindles you by not repaying a debt or wager.’
I remember listing to my high school economics teacher, Robert Leake mentioning adjustable rate mortgages when I was 16 years old. He talked about the fact that he was in a 30 year fixed rate mortgage and that he would be paying the same amount every month until he either sold the home, or owned it outright. He also mentioned that he and his wife were making an extra monthly payment each year which would reduce the overall interest that would be paid by him. He was choosing conservative behavior which reduced his risk.
We were then presented by the situation of his brother (or maybe it was his brother-in-law) who had chosen to enter into an adjustable rate mortgage. The way his brother justified this form of mortgage was “well, I’m tied to paying the same rate as a fixed rate mortgage for 5 years. If during that five year period, interest rates fall, my monthly payments will be EVEN LOWER!” His brother thought that he was winning out, working the system, and ’saving a bundle.’
“But what if interest rates go up?”
The argument for an adjustable rate mortgage was shot down with a single question. The answer is that his brother’s payments would go up instead of down. That same money that he thought he would be saving and using to pay for an extra family vacation would instead be extra money from his budget. The extra payments would have to come from somewhere; maybe his family just wouldn’t be taking any vacations for a while.
I understood from a quick 5 minute lecture that adjustable rate mortgages are gambling. You might end up paying more 5 years from now and you might end up paying less.
Fixed mortgage = Predictable outcome
Adjustable rate mortgage = gambling
Guess what?! The mega millions lottery is set to pay out its 5th highest jackpot. $270 million dollars! I sure could use an extra $270 million and I also got paid today…If I take my entire paycheck and buy lottery tickets, just think of how much better my chances will be than if I only bought one ticket or worse…if I didn’t buy any tickets!
But what if I don’t win? Then I won’t have any money to pay rent, buy food, or anything else…
Any rational person would call me an idiot for using my entire paycheck to buy lottery tickets. The lottery is gambling. You should only gamble with money you can afford to lose.
Buying a home is an important decision. It is also one of the biggest decisions of your life. If you make big important decisions without talking to more than one person, doing any research whatsoever, and presume that somehow everything will just magically turn out all right…you would be making a mistake.
Foreclosures increase the supply of homes on the market. Excess supply causes prices to drop. One of the arguments for why ARMs should be locked is to prevent more foreclosures which would cause a decline in home values. Declining home prices can be a bad thing but the value of stocks, houses, gold, and other investments fluxuates over time. That is how wealth can be created and also how wealth can be lost. When did the United States start fighting the free market?
Why should people that are already ‘homeowners’ be allowed to continue to build home equity when they can’t afford the terms of the mortgage agreement? People that can’t afford to buy a home are one of two things: homeless or renters. People that are facing issues with making their mortgage payments still have income. They were able to make rent payments prior to becoming a homeowner and they were able to make mortgage payments before the payments increased. People that are facing foreclosure can become renters without moving from their homes.
That’s right! The best solution is to have the people that can no longer make mortgage payments sell their homes. If the home cannot be sold, simple solution: You no longer own the house and you are now a renter. Your previous mortgage payment will now be a rent payment. You will not build equity because: you are a welcher! You over extended yourself and made a wager you couldn’t afford. You gambled and you lost. Sorry. Better luck next time, hopefully you will learn from your mistake, and pass on that knowledge to others so they don’t make the same bonehead maneuver that you did.
I disagree with government attempts to control the free market. Yes, I feel bad for people that got duped into buying a bigger home they could afford, people that were led on by mortgage lenders (even though they were foolish enough not to do their own research), and people that are being removed from homes that are now without tenants. But what about people that currently aren’t homeowners?
There are millions of Americans that did not purchase a home either because they did not have the available capital at the time. They did not purchase while millions of other Americans (likewise not able to afford a home) overextended themselves into situations that would benefit them in the short term as homeowners but destroy their long term future. Under a free market, individuals choose their own actions. They make their own risk/reward calculations, they do their own research, and they are responsible for both the consequences and the fruits of their investments.
Current market circumstances have led towards declines in home values as the supply of homes for sale increases. This allows new individuals to use their capital savings to purchase a home at market value rather than the artificial value that would be sustained by increased regulation to help out the ARM gamblers. Increased regulation can create circumstances that reward homeowners that can afford their homes and home owners that cannot afford their homes. If you cannot afford it, you should not own it.
The desire to help out struggling individuals is an admirable one but that desire should not cause you to create circumstances that generate large rewards for those who are struggling while also creating barriers to market entry that prevent others from receiving those same rewards. When the inefficient Russian steel industry was failing due to price competition with other more efficient companies, the government started to help out. The inefficient procedures continued, the steel industry continued to fail, and the government wasted billions of dollars. It is possible to fight a free market system that allows for the purchase of goods and services under a fair price as determined by market demand? More importantly, it is in the long term interest of our country? I believe that it is possible to fight the system and that we should do all that we can to create a system that fosters success but I think that attempts to reverse the direction of the real estate market will be a slippery slope towards a weaker United States.
I’m not sure what the best course of action is. I don’t know what effects all of the government programs to ‘help’ will have. I think that the most important thing is to continue to search for an answer but to remember that sometimes you can’t help everybody. What is in the interest of the few ARM holders at risk might not be in the interest of our economy as a whole. These overextended welchers may believe that they ‘deserve’ the help of the government, the assistance of banks, and the American dream of home ownership but that’s the thing about dreams, they must be created and manifested; an individual rarely ‘deserves’ to have their dreams handed to them and sometimes dreams don’t come true. It sucks, but that’s why the market rewards those who make careful
The primary purpose of this article was to question what is going on and whether or not we are even using the correct premise in the approach towards the solution of our problems. I would love any comments that anyone has regarding the whole situation regarding ARM mortgage holders, foreclosures, or any other subject of interest. My e-mail is email@example.com.