When Home Buyers Are Really Just Home Renters
The level of the original down payment makes the difference, argues a reader in a letter to the WSJ:
Regarding Alan Reynolds's "Assessing the President's Mortgage Plan" (op-ed, Feb. 19): Living in a house does not necessarily mean that you own the house or should own the house. If one wants to stabilize the housing market "fairly" by unilaterally altering rates, then I think the following proposal is reasonable.The litmus test for these loans should be the amount of the original down payment. If the "owners" put down 10% or more originally, then they qualify. It is certainly possible that the drop in house prices could result in negative equity that is not the fault of the borrower. If the borrowers did not put at least 10% down, then they should be considered renters rather than owners and do not deserve a bailout since they never really had any skin in the game.
Gregory Bussell
Lincolnshire, Ill.
Alan Reynolds said this in his piece:
The simplest yet arguably most potent part of the strategy is the plan to allow Fannie and Freddie to refinance conforming loans (up to $729,750) without the quaint requirement that the refinanced loan be no larger than 80% of the value of the house. This change provides access to today's low mortgage rates even to "underwater" borrowers -- those who owe more that their houses are worth. Although such borrowers have no skin in the game, President Obama assumes or hopes that their reduced payments will result in fewer defaults.
So I got a mortgage I can afford, I have more than 20% equity now and am making all payments on time but since I didn't put 10% down this indigent red neck sister humper thinks I have nothing invested in my home. Cute. Really really cute.
vlad at February 25, 2009 7:39 AM
vlad, that shoulda come with a spew warning...
since mortgages are front loaded, where in the early years you are paying mostly interest, skin in the game isn't, until much later in the loan. This is where intent is important. If you intend to buy and keep a house and you have had it for a while, you DO have skin in the game because you have put your hard earned cash into something and are getting back MORe than just a place to stay. That is what a renter gets. If you have a house you get the house too.
It is a BAD idea to give people the idea that somehow not having a big down should make it so that they don't own the house. Or like saying that "the bank owns my house for the next 30 years anyway..." This is a bad way to think about it. No, YOU own the house. The bank owns the money you used, and you have to pay it back. That makes the house valuable to you by itself. It also means you have to give serious thought on if you should walk away or sell or stay.
SwissArmyD at February 25, 2009 9:56 AM
The bank owns neither the money nor the house. You own both. The bank has a lien on the house should you fail to repay.
vlad, your point re. equity is fair. Instead of 10% down, the requirement could be 10% equity. Either way, the person has skin in the game.
kishke at February 25, 2009 11:09 AM
Nice plan. Too bad lending at these low rates is unprofitable and someone is going to have to foot the bill. My bet is taxpayers.
Rates are once again too low. The problem is that cost of funds is going up. And anyone who thinks the gov'ts cost of funds is going to stay low is dreaming. There is also too much money in the system. I can't imagine the bubble that will form once/if we get out of this. Has anyone ever asked the question why oil is not at $20 by now?
Charles at February 25, 2009 11:50 AM
Hey, wait a minute.
Possession in debt is not ownership. Assumed and/or declared responsibility is part of it, but so long as someone else holds the note, the fate of "your" property is not determined by what you want. It will be diluted by the interest of the other party.
Get clear on this idea and you'll be OK. Wandering through WalMart and believing that all those goods are wonderfully yours because you can wave a piece of plastic is dangerous for everybody.
Radwaste at February 25, 2009 3:24 PM
This Bussell guys seems like a real schmart feller.
Crid
(32% down!)
Crid [cridcridatgmail] at February 25, 2009 11:43 PM
I always thought that you had to have a down payment for a house of 10-15% before a bank could consider you for a mortgage. Am I mistaken?
Kendra at February 26, 2009 12:46 AM
"I always thought that you had to have a down payment for a house of 10-15% before a bank could consider you for a mortgage. Am I mistaken?" Normally yes but there were "Exotic" mortgages. 80/20, Interest only Arms, Balloon Arms, etc. Also you can do it without a down payment but you have to pay PMI.
"This Bussell guys seems like a real schmart feller.
Crid
(32% down!)"
Well gee wiz crid I got an 80/20 always pay on time and spend much less than 30% of my take home to pay the mortgage but I'm an irresponsible consumer who has no skin in the game. Well shit never mind the rewiring to NEC 2005, New heating system, yard work and Plumbing (all with no home equity loans). No no skin in the game for me.
vlad at February 26, 2009 8:02 AM
We bought a house in Rochester, MI, in 2000. Put 20% down.
Due to a job change, sold it in early 2007 (before the housing bubble burst), losing 80% of our downpayment.
Moved to Anchorage, where housing costs are twice what they were in Michigan.
As it happens, Alaska has a loan program for veterans, which got us a 5.75% 30-year fixed with nothing down. At our current rate, we will pay it off in 16 years.
So, I guess I do not have any "skin" in the game.
Absent pulling kids out of school, shifting all our stuff, trashed credit rating, etc.
When considering a mortgage, no matter how much skin in the game, it is essential to consider total income vs. total debt; in other words, risk of default.
Bussell never brings this up.
Hey Skipper at February 26, 2009 11:05 AM
VA loans never require down payments. Basically what the VA does is guarantees the loan for the bank-if you don't pay the VA will. Less risk for the bank, easier to get approved. A darn good program considering all vets have done for us. We bought that way, with zero down, 4 years ago. We took a 30 year mortgage and are on track to pay it off in 20 total. We still currently owe more than we can get selling now. So I guess I'm skinless, even though we still pay every month and always will. Never mind we care for the house. Never mind if I walk buying another house won't happen for a very long time if ever b/c of crapy credit from foreclosure.
How exactly I'd have skin in the game if I'd put money down, I just don't see. I'd still be unable to sell for what I bought for. I'd still have to either keep making the payments or walk. And prior investment is not supposed to be considered when deciding whether to walk on something or not, merely future returns. My future returns from a hosue wouldn't change with a down payment or no.
momof3 at February 26, 2009 5:39 PM
> in other words, risk of default.
> Bussell never brings this up.
He doesn't use those words, but it seems to be exactly the principle he's applying: Thoughtful, moderate risk vs go-go investment.
> No no skin in the game for me.
So is "skin in the game" the only criterion? Are people who invested even more thoughtfully than me not deserving of a little more consideration?
Twitchiness about wordings like this is probably going to typify public discourse for the next five or ten years.
Crid [cridcridatgmail] at February 26, 2009 11:09 PM
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