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Go to the source: Total Survivalist Libertarian Rantfest

I was watching the TV news and there was a segment on foreclosures. One of those human interest pieces where they talked about a family, blah blah blah. It got me to thinking about the topic. A smart guy I know classified foreclosures into two types.

First there was the usual type that have always existed. People who face an unfortunate or unprepared for story of hard times. Job losses, medical expenses, divorce and radical unforeseen changes in income are the big culprits. Basically bad stuff happens. He then classified the rest as a new type of foreclosure. He talked a lot about strategic foreclosures and I sort of disagree with that. Not that they aren’t an interesting phenomena but I don’t think they represent anywhere near as large a percentage as one would think.

I think most of these “new” foreclosures are because the “owners” don’t really have another choice. Now I am going to talk about some generalities about these people. First they were by and large not particularly desirable credit risks. Maybe they have a high debt to income ratio or have some ugly spots in their credit history or whatever. Due to the massive profits to be had, the lack of risk and the general insanity of the lending market lots more people qualified for loans then before. Aside from population swells or changes in earning patterns there are only so many people qualified to realistically and sanely purchase a home. I don’t know what that number is or even how to quantify it but it is relatively set. When you get way more sales than normal it means either folks are selling the homes they have or there are a lot of poorly qualified buyers.

So of the much larger number of people buying homes most were not so well qualified. Another way to measure how unqualified they were is being unable to pay a meaningful down payment. What essentially amounts to no down mortgages were commonplace for this group of new unqualified home “owners”. The folks who had been in their homes for awhile almost universally lack any significant equity. What does this mean? A perspective home owner who has the financial discipline to save up a meaningful down payment is far more likely to be able to have the discipline to make the payment. Also these folks have “skin in the game”. They will work and sacrifice and scrape a lot more to make a payment when they have 30k of hard earned money stuck in a down payment. Also they bought homes a lot more reasonably because they were limited by a down and that also just sorta injects some reality. I am not saying that is good or bad, just human nature. You play differently when the money on the table is yours.

So lots of poorly qualified people with little skin in the game got into mortgages and homes they couldn’t reliably afford. If I remember the Housing Crisis properly I would say the insanity of the housing market was a major problem long before jobs and unemployment became an issue. Even if he didn’t get laid off Tom the landscaper who makes $13 an hour can’t afford a mortgage on 400k.

What can be done to help these people? I wouldn’t say it is our individual or collective job to help anybody but  we can all agree that folks doing well is in everybody’s best interest. Some things come to mind to me. The first is getting the job market back on track. I don’t think this requires explanation. Next on a macro level is privatizing risk so banks lend in a sane manner. This means getting rid of the Community Reinvestment Act and radically reshaping or closing the failed experiments that are Fanny and Freddy among other things. A responsible banker will not loan Tom the landscaper 400k because it is an insanely high risk. (Conversely he will take a quick 5 grand and pass that risk onto some vague entity).

Well I think I’m done with this one.