A couple of years ago, I wrote about how I wasn’t buying the idea of “good debt”with respect to home mortgages. Now, with foreclosure rates skyrocketing and the housing sector in the early stages of a pretty serious crisis, I am once again reminded of that idea.
Yves Smith, who writes the Naked Capitalism blog, makes a couple of interesting points on this front:
The idea that they are homeowners in the traditional sense is spurious; it’s more accurate to view them as renters who bought a home equity option.
I agree with this statement wholeheartedly. Having a note on some property does not make you a homeowner in any normative sense, no matter what the legal fiction.
What I find most amusing is the way that home lenders have been blindsided by the rising rate of “voluntary default” on home loans. What else did they expect to happen? They, and associated financial businesses, have spent a lot of energy over the last decade or more in convincing people that their home is their “single largest investment“. Why then be surprised when people choose to treat what they have been told is an investment as an investment?
Particularly in the case of “zero-down”mortgages, lenders have given the borrower/homeowner a “long straddle” with a free At The Money call and a free put with a strike price that is essentially equal to the home’s value.
When the value of an asset in this scenario falls, the owner exercises the put option, by stopping the payments and handing over the keys. All in all, a pretty routine and rational investment decision, no?
What were they banking on? That housing prices would continue to rise forever? That the emotional attachment that borrowers have to homes as something more than an investment would somehow survive the constant battering they have given the idea and keep homeowners from defaulting? It seems that in thiscase, their marketing has worked a bit better than they wanted it to…
Tags: debt, housing, mortgage
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