I read this article in the New York Times this morning and I’ve been thinking about it for a good part of the day.
Short synopsis: not only were lower income home buyers sucked into adjustable rate mortgages and equity stripping, but so were higher income individuals. *gasp*
A few examples were given where “real estate consultants” and a lawyer were able to re-negotiate their mortgage terms with their lenders. Either their loans were refinanced into fixed interest rates or principal balances were reduced, or both. One of the “real estate consultants” had their principal balance reduced by 27%!
I know that a little over two weeks ago, Bernanke broached the subject of principal reductions as an alternative to simple interest rate reductions. I’m not a big fan of this suggestion and feel interest rate locks are more appropriate and fair to all those involved.
It’s like the stock market, if you buy a stock at $170 a share and it goes down to $2 a share (does that ever happen…), you lose out. Houses should be the same. If you pay $500,000 for a house and its value goes down to $350,000, that’s how it works. A house is called an “investment” for a reason. Sometimes investments go up, sometimes they go down. That’s the risk. The bank shouldn’t bail you out with principal reductions. That only hurts other homeowners that continue to dutifully pay their mortgages.
Perhaps most troubling is the nagging thought in the back of my mind about lower income buyers. Do they know that they can negotiate with the bank if they are in trouble? Has this even been presented as an option to them? Or is it only the more sophisticated buyers that know how to “work the system” to improve their situation?