Mortgage Mess - May 2008

I am starting a waiting list for anybody who is interested in buying a new Bentley or Rolls Royce with no money down, 1% financing for the first few years, and no income qualifications for borrowing the money.

And the Democrats in Washington will make sure that the 1% interest rate becomes fixed if I cannot ultimately afford a true market rate. Or better yet, President Hillary Clinton will stop the financing company from repossessing the car if I cannot make my payments.

Of course, the financing wizard who arranged my loan knowing that I cannot afford the car will be protected and get to keep his high commission from the loan even if he is falsely assuring me I will be able to resell the car in a year for a large profit. And the car dealer already made their fat profit. What a deal for all!

Certainly you realize I am really writing about the housing and mortgage industries which are going through tough times right now thanks to the unchecked speculation of virtually everybody in the industry. And now Uncle Sam plans to come to the rescue.

When more than 98% of mortgages are being paid on time, why should our federal, state, and even local governments come to the rescue of the 2% who made bad financial decisions? And why should buyers of foreclosed homes get a proposed $ 7,000 tax credit which will only cause sellers of non-foreclosed homes to lower their prices by at least that amount.

And should builders be allowed to apply current accounting losses to previous years during which they happily accepted deals knowing that all real estate booms eventually come to an end? Whatever happened to the expression “those that live by the sword, die by the sword?”

There are many reasons for the current problem. From mortgage brokers and bankers who were more interested in booking loans for their commissions rather than verifying that borrowers could really afford them, to builders who presold entire condominium buildings or home developments before breaking ground without caring about the ultimate intentions of their buyers.

But ultimately the responsibility falls on the individuals who obtained below market adjustable rate or interest only mortgages that enabled them to buy more expensive homes than they could otherwise afford. Or to those who simply “invested” in the real estate market believing there would always be a market to flip their houses or condos.

I still remember attending a real estate investment show held by a mortgage broker who had tried to talk me into an interest only loan for my current home. Frankly, the folks who attended the show did not appear to be sophisticated, financially viable, buyers. But that didn’t stop the developers from Fort Meyers, Port St. Lucie, and Orlando from signing them up for deals. Interesting how those three markets are now among the leaders in the Florida real estate collapse.

So where do we go from here? Should the Democrats in Congress (with President Bush along for the ride) rescue the distressed homeowners who are in financial despair while letting their easily identified mortgage brokers and developers keep their profits? Or should we let the marketplace naturally resolve the situation? I’m rooting for the latter.