When you have no skin in the game, you just don’t care…
The idea of encouraging home ownership as public policy has good merits at its core – one merit is to encourage people to care about their neighborhood, and invest and keep up the look of their own properties. It is common knowledge that when someone owns something, they take much better care of it than if they did not own it.
And if you are a landlord you may know this: renters sometimes care little for an apartment. Many landlords deal with damaged property, broken appliances, holes in the wall, etc. once a tenant moves out. And this attitude isn’t confined to real estate. How do people treat rental cars? Not well usually.
With all this said, it should come as no surprise that when a buyer can get into a house, with NO money down, then of course many of these buyers won’t feel fully vested in their new house. If the mortgage gets too expensive because of a rate adjustment, it is easier to send the keys back to the bank “1980’s Texas style,” and just walk away from the problem. Here is an excellent story from “60 Minutes” outlining some foreclosure stories and how the people mentioned in the story got there. Pay special attention to the part where they mention how people who put no money down feel NO RESPONSIBILITY for their own actions when they just default:
This scenario – home buyers who put nothing down walking away from their obligations in times of trouble – will only continue to repeat resulting in widespread moral hazard (HERE is a nice explanation of what ‘moral hazard’ is). By creating mortgage welfare, that is, assisting people to buy houses when they really weren’t ready to buy, and propping up the number of home buyers (and helping to prop up the real estate market), we have almost ensured a violent moral hazard vortex on the other side (the DOWN side).
And now, we want to find ways to keep these folks in their houses a little longer with some government funding – perhaps until we enter a deep recession and they finally can afford no mortgage payments. This will fuel another moral hazard, which has already taken root, which is the idea that business and individuals should not focus on risk management too thoroughly because the government will bail everyone out. What we need is a massive bath to “reeducate” people on risk management and only then will we get the housecleaning that we need. But for now, we have to deal with the circus that is surrounding the question of “what is appropriate public policy” for such an issue. It seems that we may settle for the policy of “privatizing the gains and socializing the risks.” That is, if you do well, keep the profit, if you fail, Uncle Sam (the rest of us) will bail you out.
For more information on foreclosures, check out Mr. Mortgage’s post today HERE.
Another fellow I like reading, talks about foreclosures for military personnel HERE.
A great article on Moral Hazard can be found HERE.