Should the 30 year mortgage be relegated to the trash heap of history?

When I look at what is now a worldwide financial horror unfolding – a horror that began in the US and quickly cascaded over most of the entire planet-affecting all but perhaps remote natives somewhere that still use sound money(eg, polished shells, beads, shiny rocks, monkey heads, ect), I cannot help but wonder weather the housing bubble, followed by the housing crash and all the Bad Stuff that followed, wasn’t enabled in large part by the availability of 30 year mortages?  Sure, there were *many* enabling factors: liar loans, little or no money down mortgages, greedy lenders, commission-driven RE agents, corrupt apparaisers, and of course, the irresponsible home buyers that bought more house than they could afford.  There’s plenty of blame to go around, but I haven’t seen anyone broach the subject of wether the long-common option of indebting oneself for the next 30 years to pay for that big box you just bought to live in, may possibly be one of the largest factors in setting the stage for the gigantic fall now ongoing.

Now, before anyone accuses me of insinuating that paternalism in the form of say, outlawing or severely-restricting the availablity of 30 year mortgages to those with guaranteed, legally-unchangeable structured settlements, along with a ban on those with 30 year mortgages from obtaining a second mortgage, a HELOC, or refinancing for the life of the loan(all of which would undoubtably have prevented much of the present carnage, but at the expense of freedom of choice and personal liberty), is a good thing, let me state my personal position loud and clear before we go on:

I am a Libertarian and big fan of Ron Paul.  I also know that personal responsibility MUST go hand in hand with liberty, and while I am 100% in favor of any competent adult being free to make any financial arrangemnets he wants,  willingly sign any contract, and if wants to, indebt him or herself for the next 100 years so he or she can get the $800k McMansion of their dreams on a salary of $30k(gross!) a year.  AB-So-LUtely!  And if to decorate the driveway of their new McMansion requires nothing less than a $45k Lexus or Mercedes, and if keeping up appearances means getting a 10-year loan on a rapidly-depreciating asset(?;), than so be it.  In fact, I would not be opposed to desperate luxury-auto manufactures offering 0% in-house financing and 40 year terms(heck, I’m surprised *they* haven’t thought of it.  Or maybe they have, but now there’s too little credit left to fund such an offer).  Of course, how many people would actually take up such an offer?  My guess?  Too many. 

We still live in an era of instant gratification, coupled with an entitlement mentality and a much less ingrained sense of personal responsibility than people seemed to have had say, 30 or 40 years ago.  Sure, there exceptions, but by and large it’s still the era of the “Me”-generation, living for today, and not concerned about tomorrow – when the Bill comes due.  So yes, I would suspect that many who could not afford a $100k+ car, would jump at the opportunity to be seen driving “their” new Maserati.  A nation of minimum wage earners driving Ferraris and Lambourghinis -likely to be left for the repo-man’s hook the first time they break down and their “owners” discover $5k may not even cover a major tune-up.

While the 40 year car loan scenario is intentionally exgaggerated to magnify the utter foolishness of being indevted for so much, for so long, and really, for so little(when you factor in the negative ROI).  It’ isn’t_all_that_ much  different with houses….not when you’re paying and obtaining a mortgage for a home that’s 6x or even 8x your yearly gross salary, as some have done – enabled by the “leveraging” power of 30 year, 95% LTV financing, your friendly real estate salesperson egging you on by cooing in your ear: “It’s a GREAT time to buy!”, the friendly Loan Officer assuring you that you can afford it – while exchanging winks(if not loving glances) with the friendly appraiser – all of whom stand to gain by your purchase and none of whom have your best interests at heart.  It’s not even that they may have been evil or corrupt or less than honest and forthright in their dealings – while some certainly are, and a lot of shady stuff went on and probably continues to go in the industry, it boils down to simple human nature, that being, people will almost always act in their best interests, and people who’s income depends largely on commissions are going to be only too happy to sell you a home you can’t afford, at too high a price, and at the lousiest(most profitable) loan terms they can get away with.  That is a fact of life and How The World Works, and any ostensibly legally-competent adult that doesn’t realize this going in, and then compounds the problem by failing to read and understand exactly what they are getting themslves into before signing on the dotted line, have only themselves(and perhaps a combination of their schooling and upbringing) to blame for their woes.

As I said, I’m 100% in favor o 2 or more consenting parties to make whatever financial arrangements between themseves that they wish, and my philosophy extends to practically EVERY area of one’s life.  I am in favor of you exercising your right to ride a motorcycle without a helmet, drive a car without a seatbelt, and smoke heroin for breakfast to go along with your scrambled eggs and morning Bloody Mary(ies), if you so choose.

BUT….

I draw the line at picking of the tab for your mistakes.  If you delevop a mysterious spot on your lung from the crap your chiva was cut with, and now need medical attention, don’t send ME the bill.  If you get into an accident and go through the windshield because you weren’t wearing a seatbelt, I don’t want to have to pay for the multiple surgeries you’ll need to stop looking like a human jack-o-lantern.  If you fall off your bike and crack your skull open, don’t send me your neurologist’s bill.  And finally, when it turns out you really COULDN’T afford that house everyone(including yourself) convinced you you could, I don’t want the bill for that either.  See a pattern, here?

Call me crazy, but once I start getting invoiced for your stupidity or recklessness, I tend to feel I ought to at least have a say in how you conduct your affairs, if not have outright veto power.  And since so many phukkups with 30 year mortgages are now asking, nay….*taking* money from responsible renters and responsible homeowners via the gov’t appropriating our tax dollars(and that of those who, conveniently enough, aren’t born yet, so they can’t protest – not that it matters because this massive transfer of wealth occurred inspite of the overwhelming opposition to it, so in retrospect, it wouldn’t matter if they WERE here, screaming their lungs out in protest).

The point I’m getting at, is that perhaps it’s time to start looking out for OUR best interests, and eliminate one avenue for the irresponsible to stick it to the responsible, and make it much more difficult for the irresponsible to get themselves so deep in hock for such a long period of time.  Much like the 40 year car loan(who I suspect WOULD get some takers – those least able to afford such cars), the 30 year mortgage allows people to effectively buy homes they cannot afford, but spreading out the payments over half a lifetime(and hoping nothing Bad happens in the meantime), makes such a purchase possible.  Again, if no one else was forced to pay for the actions of the irresponsible, I would never in a million years be writing this.

Another good reason to eliminate too-easy for too much$  financing, is that the too easy availability of too much credit, at too low an interst rate for too large an amount, for too long a time, to folks with too low an income and too low a down payment, is what fueled the speculative bubble, and drove home prices into the stratosphere – situation that tends to feed on itself like a vicious cycle – until it runs out of fuel, and the music stops.

I propose a maximum term of 10 years on home mortgages, with a mandatory requirement for 20% down, from a traceable, documentable source of legitimate savings or earnings, and a verifiable income requirement commensurate with the amount of financing sought.  This would accomplish several things at once:

It would limit the price of a home that someone with such-and-such an income could buy.  Buy limiting the ability to leverage their income would-be homeowners could only get themselves in so deep.  If an income of say, $40k a year only safely supports buying a $80k home under those circumstances, then so be it – either keep renting until you save up some more money, or be satisfied buying an entry-level house you can afford.  And although you could argue that these tighter lending rules and shorter maximum terms are unfair to responsible homeowners, I would counterargue that, because the same rules would be applied to all, it’s really not unfair.  “Compared with the unfairness of forcing  responsible renters and responsible homeowners to pay for irresponsible home-“owners” mistakes, I’ll take it.  It would also help keep housing prices more affordable(even in Bull Market times), and help keep prices from getting overheated again. 

So what say ye?  Have at it!

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5 Responses to Should the 30 year mortgage be relegated to the trash heap of history?

  1. aetiusromulous says:

    You have ignored three issues:

    1) The current overstock of home supply and the effect restricting entry to the market will have on underlying asset values, ie: home prices.

    2) The willingness of private capital to invest in a market with collapsing asset values

    3) The dramatic effect of the change in demographics, which will inexorably move Baby Boomers out of home ownership, leaving yet more empty inventory, for people who have not been born to buy.

  2. recessionnews says:

    Isn’t it fair to say that the first two issues you bring up, were largely caused by and are a result of
    too many people being (artificially-)enabled to buy homes they couldn’t afford? Afterall, if we were not now seeing tens(hundreds?) of thousands of forclosures hitting the market in such a short period of time, there would not BE such a massive oversupply, and consequently, collapsing asset values, in the FIRST place.

    As to the third issue, I’m not sure I follow? What do you mean by “move Baby Boomers out of homeownership”?

  3. aetiusromulous says:

    To the last issue first.

    The western world is suffering through a major demographic contraction as the cohort born at the close of WWII ages and leaves the market for all things (except for,perhaps “Depends”). The population cohort following is much smaller and less “wealthy”. The houseing over supply across the west was going to suffer regardles of anything else. Asset values were going to fall regardless, and virtually no accounting for that has or had been considered.

    The devious and arcane developments in American lending policy were nothing more than atttempt to prop up that asset class in advance of this demographic issue. Had that crap not plugged the dyke four years ago, the decline in asset value would have still occured – just earlier and more slowly.

    The American mortgage mess, while unique to America, is a symptom – and not a cause – of the prima facta dynamics of propping up a lifestyle against the laws of supply and demand and nothing more. The expectation amongst everybody, even now, that home value must always rise and never fall is the culprit.

  4. recessionnews says:

    Yes, our population is slowly aging, but it also continues to increase, so an aging population alone doesn’t explain the recent glut of empty and foreclosed homes, now numbering in the millions. If a million boomers died, they were replaced by over a million younger people, so it’s not simply a population issue fueling the housing crash.

    I agree that those following in their wake, tend to be less well off than their boomer predecessors and will likely not be able to achieve the standard of living the boomers enjoyed – a trend I unfortunately see continuing as I try and envision the world the next generation is going to inherit from this one.

    You can’t blame it all on boomer excesses, however, as
    the majority were responsible homeowners and renters,
    and among the irresponsible minority of speculators, flippers, gamblers, HELOC-abusers, ect, were some Gen-Xers joining in the credit-fueled housing “boom” party as well, trying to cash-in on the same delusion
    their older brethren got caught up in: that housing prices would continue to rise forever – and to a degree, it was a self-fullfilling prophecy until the bubble burst.

    Greed, stupidity, recklessness, ect are human traits
    that know no generational boundaries and are certainly not limited to Boomers, so to frame the housing crash in the context of some sort of a generational blame game, when the minority were irresponsible, and ALL of us(boomers, Gen-Xers, Gen-Y)
    are either now screwed or in imminent danger of being screwed as a result, isn’t particularly helpful or fair to the majority who were responsible with their finances.

    It also distracts from the main issue of wether the 30 year mortgage played a major role in fueling the housing bubble, by enabling people to buy homes they really couldn’t afford, which allowed them to live a lifestyle beyond their means – a lifestyle that apparently, the Rest of Us are now expected to foot the bill for.

    The housing crash, financial crisis, deep recession(if not outright depression), and widespread economic ruin are a done deal, and water under the bridge at this point, in that we can’t hit “rewind” an do-over what has already happened. The damage is already done, and still ongoing.

    We can’t change history, but we can (hopefully) learn from it in an effort not to repeat past mistakes, and I think one overlooked mistake is the availability of the 30 year mortgage, which may have played a major role in setting the stage for the current economic disaster.

    I think it might be time to eliminate the 30 year mortgage as a financing option for home buyers, for several reasons:

    1)American society has changed, and not for the better. I say this as someone who has lived here for over 45 years, and noticed the changes. The 30 year mortgage has been available for quite a long time,
    and there were relatively few problems with it. Defaults and foreclosures were rare, and something to be ashamed of and to be avoided at all costs. People in general were more ingrained with a sense of personal responsibility. And back then, owning a home and paying the mortgage, taxes and insurance
    usually required only 1 parent working F/T, with the other staying home and raising the kids, perhaps working p/t during school hours. Nowadays, more often then not, it takes both parents working F/T to pay the bills, and pay for daycare, and the kids are raised by strangers from a very young age.

    In the old days, it was a straightforward 20% down, and a fixed rate for 30 years. Very few ever took out a 2nd mortgage, and no one I know up until perhaps the mid 70s, had anything like a HELOC. In
    the recession of the Carter years(which I remember well), there may have been gas lines, and higher unemployment, but few were losing their homes.

    Things changed of course, by the 90s. The advent of the home-equity-as-revolving-credit-line later on, combined with a decreasing sense of personal responsibility, an increasing sense of entitlement, along with the live-for-today, to-hell-with-tomorrow “instant gratification” ethos, oversized credit card LOC, and what would later be seen as the self-destructive contest of keeping up with the Jones on steroids, taken to new heights by
    abusing HELOCS to buy big expensive toys, allowed
    the nouveau riche wannabes to snowball consumer debt
    to all time highs. This was made even worse by the
    5% down mortgages(which later evolved to 3% and even
    0 down mortgages, that left buyers upside down right from the get go, and left little incentive to stay and work things out, rather than walk away at the first sign of trouble, early on in the loan.

    2)The days of being “married” to the company you worked for, are over. There was a time when one could reasonable expect to be working for the same company his whole career, and then get a pension, to boot. Now, we have the age of the disposable worker, who is simply a commodity to be shelved or replaced at will. Pension?!? Build your own! Dental Plan?!?
    Chew on the other side! Health Plan?!? Don’t get sick!

    “Job-security” is largely a thing of the past – now, no matter even if you work for a union shop or the govt. With job security declining to “non-existant”,
    perhaps it might be a good idea to re-examine wether
    committing oneself to 30 years of debt-slavery is
    prudent in these permanantly-uncertain times.

    3)Touching on my original post, the issue of socialism
    and wether we are now expected to be responsible for
    aiding the irresponsible homeowners, and if this is to be the Brave New World here in America, shouldn’t we at least try and limit the extent of any future debacles we might be forced to pay for?

  5. aetiusromulous says:

    Well, I could have written most of that myself. Couldn’t agree more for the most part.

    In the end, social philosophy and politics are distractions. Heavily managed economies are inevitable now, and the only way to find a bottom in a global economy where free markets are now dinosaurs.

    Mortgage regulation – as you suggest – is indeed a part of that, however regulating that one slice of capitalism alone can’t fix anything as long as it sits outside a system free of comensurate regulation and control. It’s a social package, and one I’m afraid Americans are simply going to have to accept.

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