Monday, September 15, 2008

Mortgages and Ownership

The American Mortgage industry began with the assumption that a mortgage would be a stop gap measure on the path to full ownership of a piece of property.

Today, housing prices are so high that full ownership of property is not a feasible option for the majority of Americans. The few people who are in a position to buy a home outright would be wise to have their investments diversified.

The fact that people are no longer seeking full ownership of the home when they buy a piece of property makes mortgages problematic. A person does not really own something when their is a lien against it.

When you pay your monthly mortgage payment, you can never smuggly say "I own x percent of a house." What you have is a piece of property with a free floating risk associated with it. This type of situation is better described as illusionship than ownership.

The idea that people have mortgages that they will never fully repay looks ugly from both the individual and societal level.

From a societal level, we have millions of people clinging to the hope that the fixed interest they are paying on their loan will never get too far out of whack with their property value. The whole paradigm is something that pushes a population toward a precipice.

The mortgage problem is not simply the fault of a few bad actors that engaged in predatory lending. The idea of mass marketed mortgages is systemically flawed.

Our two presidential candidates seem to believe that the fix to the problem is a new regulatory regime that will renew faith in our mortgages.

I am back to thinking that we need to rethink the financing of housing from scratch, and that thinking should start with the idea that a person should not take out a loan until their is a very clear path to full ownership for the property in question.

See Shared Risk Financing Post. This post is also related to the strange math post. The mortgage model is based on a mathematical model that says we can finance real estate at money market rates because real estate will always appreciate at a rate faster than inflation, which is a dubious assumption.


Scott Hinrichs said...

Homes consume a larger portion of income largely because we have substantially increased the square footage of living space per person. The cost of housing per square foot in constant (inflation-adjusted) dollars has remained relatively constant. But we want bigger houses, we have smaller families, and we have many more split families that occupy multiple homes than we used to have. Thus, homes consume more of our income.

We also have an industry that is intent on keeping people in debt, encouraging them to use their home equity as a cash box to buy consumer goods and to travel.

Our cultural attitudes need some adjustment.

y-intercept said...

I don't think the housing market woes are simply the fault of buyers. There is a huge demand for starter homes, but no-one is building such things these days.

The formulas set by bankers dictate the size of the house by the price of the land. In their formula, You don't put a $10k house on a $300k piece of land.

I think you are correct that social engineers want a society where people are chained down by massive consumer debt.

Anonymous said...

KD, you say:

"Our two presidential candidates seem to believe that the fix to the problem is a new regulatory regime that will renew faith in our mortgages"

Shirley you must be mistaken. This behavior, while expected from liberals, coming from McSame, a "Ronald Reagan Republican"? A proposal to increase government regulation of the economy? The pillars of Reaganomics are quaking at the thought.