Wednesday, June 08, 2011

Is there a right to buy a home that you cannot afford?

It has been a long time since I bought a house. When I did there were fairly tight standards about how large the down-payment had to be and how large the monthly payment could be in relation to your monthly income. The housing bubble and the corresponding mortgage crisis were direct results of waiving those standards.

In the wake of that crisis new standards have been proposed. To get a premium loan you will have to put down 20% down-payment and payments cannot exceed 1/3 of your income. These are important.

The down-payment is to keep people from walking away from their loans. It is one thing to default on a zero-down home because is it worth less than your loan. You are not losing anything. If you had to put up a big down-payment then you would be leaving that behind. It also reduces the amount of your loan so that your house could lose 20% of its value and still be worth the amount of the loan.

The requirement that payments cannot exceed 1/3 of income is even more basic. This makes sure that you can afford the payments.

If you don't qualify for a premium loan then you still might be able to get one but it would not be as attractive to you or the bank. On your end you would probably have to pay higher interest. The bank would have more trouble selling the loan so they would have an incentive to be selective about who they grant loans to.

These regulations should be obvious but there are objections.

If this rule goes through as it stands, the demographic of borrowers who get (favorable rates) will be white and wealthy," said David Stevens, chief executive officer of the Mortgage Bankers Association and former commissioner of the Federal Housing Administration. "African-American, Latino and first-time home buyers will be charged higher prices.

This raises the question, is it a right (or even desirable) to get a mortgage that you cannot afford? The Clinton administration seemed to think that there is such a right which is why the loan requirements were waived in the first place. The Bush administration continued this practice.

So, why is this a good thing? I know that "the American Dream" is supposed to include owning a house but historically more than a third of the nation rented. We got into trouble when we tried to change that proportion. Why keep encouraging people in self-destructive behavior?

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