Let's Stop the Housing Crisis Once and for All

• Report this Comment On July 09, 2009, at 3:10 PM, outoffocus wrote:

  How about we just leave the housing market alone so that prices come down far enough for people to afford the 20% down payment. If everyone buying a home right now were required to put down 20%, housing prices would fall alot lower in many areas. I still don't see how people are buying homes now. With homes somewhere around $250k, where are you getting the $50 downpayment? And if you do put $50 down, are you depleting your emergency savings in order to do so? Emptying your entire emergency savings into a down payment in many ways is a bad idea in a bad economic environment.

  I would like to meet the person, especially a first time homebuyer, to can afford to put that $80,000 down on that $400,000 house. I need to find out what they are doing for a living so I can make that kind of money.

• Report this Comment On July 09, 2009, at 3:32 PM, MarkfromReston wrote:

  Your fix for the housing crisis is indeed a simple solution, but wrongheaded at that. Why mandate a 20% downpayment? Why not 15% or 10%? I agree with you that a meaningful downpayment should be required, but selecting your optimal 20% amount based on nothing more than "that's what we used to do" seems simple and may not have provided insulation against some of the other tactics that were used to create this crisis. For example, many people took out piggyback mortgages (so-called 80-15-5) whereby only 5% was the downpayment. Also, would your plan limit home equity loans unless you had 20% equity in your house? In an emergency, wouldn't it be better to draw from a home equity line at the cost of the prime rate instead of paying an emergency expense on a credit card charging 19% interest? There were many culprits to the housing crisis, including Americans' desire to consume more without saving or paying for it first, but the government regulators were in a position to do something about this crisis when it was developing. For example, Congress and the SEC have done nothing to discipline the credit rating agencies that rated every mortgage backed security AAA without any regard to the creditworthiness of the borrowers, yet these rating agencies were approved by the SEC and given a statutory license to provide their ratings without any regard to whether they were correct or unconflicted. What about the banks that issued nothing but pay option mortgages with low teaser rates that exploded on unsuspecting borrowers. Why didn't the Fed limit these banks use of pay option ARMS when they got to be over 25% of all their mortgage originations and when almost all of the new mortgages in California, Las Vegas and Florida were this type of mortgage? And then there was the SEC allowing the investment banks to increase their leverage from 12 to 1 up to 40 to 1. And I'm not even touching on the impossibly conflicted policy of having two government entities (Fannie and Freddie) that are supposed to be shareholder-owned, profit maximizing companies with public policy missions, or the tax deduction for mortgage interest that let's you deduct the interest on a $1 million dollar mortgage. In my opinion, if you are going to fix this problem so it doesn't happen again, you should address all of the contributing factors. Otherwise, the market (and the well-heeled players) will just find a way to exploit the openings.

• Report this Comment On July 09, 2009, at 3:40 PM, johnnymaynard wrote:

  The key to survival for housing related stocks is cutting costs. Eventually, this thing is going to be over, even though it may be 2012 before that happens. It astounds me how people continue to invest in what are now junk stocks, relating to the housing industry, paying prices that are set in such high P/E multiples that one would think we were still in the middle of the housing bubble.

  Companies, like Lowes, for example, are selling at P/E ratios of 16 to 1, and are probably as doomed as General Motors. Such dinosaurs keep looking in the rear view mirror, and cannot see what is ahead of them. Lowes is expanding and increasing its costs in the midst of the worst real estate depression in history.

  Companies like Home Depot, which are deeply cutting costs, will not only survive, but will do much better, a few years hence, than they are doing now. Their rivals will go bankrupt and they will have whatever is left of the market for themselves.

  But, right now, even Home Depot shares, although a very well managed company, are way overpriced, like the rest of the post-rally market. We need a good crash to bring these overpriced stocks back to viability.

• Report this Comment On July 09, 2009, at 3:40 PM, MADACASTO wrote:

  I don't understand if I have an outstanding credit score (say 800+), I'm over 35 years old and have a strong debt to income ratio - WHY DO I HAVE TO GIVE A BANK 20% EQUITY FROM DAY ONE, ONLY TO TIE MY MONEY UP IN A NON-INTEREST BEARING ACCOUNT THAT THEY CAN SECURITIZE AND EARN INTEREST ON!!!!!!!!!!!! They're strangling the housing market with these requirements. Defaults occur because banks aren't checking on income, credit and assets (stated income liar loans) and they handed out loans to people who shouldn't have been buying in the first place. Don't punish all because of the sins of the few. If I've shown the tendency to be responsible with my money, don't take it from me - LET ME INVEST IT SO I CAN MAKE MORE AND BUY A BIGGER HOUSE IN 5-10 YEARS!!!!!!!!!

• Report this Comment On July 09, 2009, at 3:41 PM, MADACASTO wrote:

  GRRRRRRR!!!!!!!!!

• Report this Comment On July 09, 2009, at 4:45 PM, Intlinvstr4life wrote:

  Caveat emptor!! A housing market that significantly out-paces the average buying power of a long term employment curve is in serious trouble since there is a very strong corollary between where main street works and where it lives. The "one in five" who are crying now are those who ignored this coincidence, or those who are ignorant of financial & economic matters in general and are better off not stepping onto the playing field. All in all no real value (i.e. the country's long term ability to create and produce) was destroyed by the bursting of the bubble. However, creation/growth of real value in the future may be hampered by the government's recent attempts to prop-up the false value created by the bubble in the form of future taxes required to refill the public coffers.

• Report this Comment On July 09, 2009, at 4:49 PM, BlueBoomerHD wrote:

  Stop the housing crisis and prevent the next by allowing property owners to use the bankruptcy court system for these types of secured loans. Currently home, and property, loans are the only secured credit exempted from the bankruptcy courts.

  High risk loans will not be made when the court might restructure and force feed it back to the lender. Lenders lobbied hard for this exemption, and went nuts in the 80s and again at the start of the 21st century, because they could.

  Simple, corrective and preventative measure.

• Report this Comment On July 09, 2009, at 5:07 PM, thisislabor wrote:

  you know as far back as i can remember i was always raised by my parents that 20% down payment is the standard minimum down payment to have on a home loan, and im only 23.

  been asking around lately and apparently no down payment what so ever is a really good idea that happens to be really common for some reason? I don't know i'm not sure when that became the scenario but it has happened somewhere in the last 23 years obviously.

  speaking of which, why do people even make home loans to begin with? makes no sense to me other than from the banker's perspective.

• Report this Comment On July 09, 2009, at 7:01 PM, Paulusbd wrote:

  What about those of us who did pony up the 20% down out of our investment accounts because we did view the house was an investment? And are still underwater? I think there are plenty of people out there who did not bleed all the equity out of their homes and paid our dues. All the while we watch in horror as the bottom falls out and the hard earned money we put in evaporates with the value of the house. In spite of following all the rules.

  A little research into real estate history shows this is not the first time this has happened. And in those cases, it was double jeopardy because the banks called the loans in some cases because the house value was not enough to support the loan. In my case, I have a contract with my credit union that clearly states that the bank will not call the loan in this case, so long as I make my payments.

  This is truly a complex issue that involves many moving pieces and there are no quick fixes. My goal is to stick it out and pray I'm not laid off or have any more of my salary reduced.

  The factors I see involved are:

  1) Very low interest rates

  2) Very low lending standards

  3) Home Equity Loans capitalizing on those who bought early and now have massive equity

  4) Home values artificially sky rocketing because of 1 and 2. It was a feeding frenzy

  5) Real Estate Investing and home flipping because of the inflated home values.

  (And I think I'm just scratching the surface)

  Financial institution standards could have prevented much of this by not allowing people to bleed every last drop of equity out and by upping the lending standards so that only people who could truly afford the loans got them.

• Report this Comment On July 09, 2009, at 7:08 PM, ozzfan1317 wrote:

  Grrr My GF likes Dinos...lol and I say 10 % makes more sense.

• Report this Comment On July 09, 2009, at 8:08 PM, thisislabor wrote:

  the credit rating system works... when you require a 20% down payment. it's been working for years up until we recently stopped requiring that down payment.

  just sayin'

• Report this Comment On July 09, 2009, at 8:16 PM, thisislabor wrote:

  intlinvstr4life:

  "Caveat emptor!! A housing market that significantly out-paces the average buying power of a long term employment curve is in serious trouble since there is a very strong corollary between where main street works and where it lives. The "one in five" who are crying now are those who ignored this coincidence, or those who are ignorant of financial & economic matters in general and are better off not stepping onto the playing field. All in all no real value (i.e. the country's long term ability to create and produce) was destroyed by the bursting of the bubble. However, creation/growth of real value in the future may be hampered by the government's recent attempts to prop-up the false value created by the bubble in the form of future taxes required to refill the public coffers."

  - smart man.

• Report this Comment On July 09, 2009, at 8:30 PM, TMFGalagan wrote:

  Very good points from all - thanks!

  outoffocus: You're right -- it takes a lot of work to save up for a down payment. But in my view, it's better to do that work and wait to buy than to get in over your head with a 100%-financed mortgage.

  MarkfromReston: You're right that replacing 20% with some other number might work. I thought 20% was a reasonable number both because of its historical use as well as because it's roughly equal to the drop in average home prices since 2006 as stated by the National Association of Realtors: http://www.realtor.org/research/research/ehsdata

  MADACASTO: Anytime you buy something, you spend money that could otherwise earn a return. Why should a home be any different? I don't think homeowners should feel entitled to have no equity sunk into their homes. It leaves the rest of us open to exactly the moral hazard we've seen during the crisis.

  Paulusbd: Those who actually lost their own money in big down payments during the crisis have largely been ignored. If everyone had put money down, there would be fewer people underwater on their loans, and it would be far easier to help those who were underwater. There wouldn't be the moral outrage that there is helping those who haven't lost much of their own money.

• Report this Comment On July 09, 2009, at 10:33 PM, VaughnJCannon wrote:

  Oh, 20% down would fix the housing market, it would kill it. Great idea!

• Report this Comment On July 13, 2009, at 9:41 AM, Fool wrote:

  BudHutch: As a home builder, VaughnJCannon is exactly right. 20% down would finish killing it and then bury it!!!

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