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A Down Payment On The Next Mortgage Collapse

Just as we are starting to turn the corner with a housing market recovery, we may already be close to making a down payment - so to speak - on the next debacle in the mortgage market.

It is hard to believe we could repeat our recent mistakes so quickly. Thousands of homeowners who engaged in “strategic default,” walking away from their mortgages because their homes were worth less than they owed, will have blighted credit records for years to come. And private investors are afraid to touch mortgage-backed securities because of all the recent efforts to blame lenders for borrowers’ failure to live up to their obligations.

Yet, amid all this, there is still a chorus of protest at the idea of requiring a substantial down payment for new mortgages. Astonishingly, we are talking about letting a new generation of homebuyers take on the obligations and responsibilities of debt-financed property ownership with little or no money down.

Either this is a case of mass amnesia, or some self-appointed consumer advocates and their water-carriers in Washington seriously misunderstand the role of the financial system. It is not intended to be a conduit to move cash from people who have it to people who merely want it.

The savings and loan crisis of the late 1980s and early 1990s, induced by a housing downturn and turbulent financial markets, left its own legacy on the housing market. One of the lessons we should have learned was that having homeowners put significant equity into their properties is a prerequisite for a stable market. After all, a traditional American mortgage represents a big risk by the lender, who locks in a fixed interest rate for up to 30 years and relies solely on the future earning power of a private individual or couple, secured only by the value of the mortgaged property (or, ultimately, by the federal government’s housing finance agencies). The first person to lose money when a home becomes unaffordable, or when its value declines, ought to be the home’s owner, not the party who accommodated the homeowner’s desire to borrow money for the purchase.

Easy-money advocates ignore this logic. They seem to think poor people are entitled to own the same property as wealthier people. The thing about being poor is that you just don’t have as many assets, including property, as other folks. I am entirely in favor of helping poor people become more affluent, but you don’t do that by just lending them large sums of money that they may, or more likely may not, ever repay. All you have accomplished in that case is to turn poor people into deeply indebted people.

Renting a home is a perfectly respectable way to live while accumulating the capital to eventually buy one, if that is your ultimate goal.

We seem to be stuck learning the same lessons over and over again. Homeownership is simply not for everyone - and I say this after 30 years of homeownership. A house can absorb as much money as you are prepared to give it. Maintaining a home, insuring it and paying the taxes on it are major obligations, which ought not to be lightly undertaken. It is not reasonable to expect lenders to put up all, or nearly all, of the money.

It is even less reasonable when law and politics permit mortgage holders to walk away when their mortgages are unsustainable, or merely inconvenient, and encourage the public to blame lenders for the ensuing losses. The result, as we can now see, is that prospective lenders will become highly reluctant to lend to any but the most secure borrowers.

How many times do we have to go through this cycle before the appropriate lessons stick?

With any luck, this time will be the last. If potential mortgage investors see the world as I do, they won’t touch mortgages that do not have substantial homeowner equity behind them. To attract private capital to this corner of the financial markets, we are going to have to start respecting, and protecting, the people we ask to furnish the capital.

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