Story Comments

The author has hit on many subjects here, but has some how missed the point. The ARM loans were and are a band aid to a short term situation. These loans were made to give the borrower an oppertunity to better thier credit and put thier finances in a better state. The sad situation is, the borrowers failed to meet that part of the plan and in doing so removed themselves from being able to get a better rate on a fixed rate loan....many A and A- lenders still offer a 5.875 30 yr fix with out having to pay any discount points......This isn't all shame on the bank....

Morgage crisis is because to many Americans have bought into the false premise that the only way to the 'American dream' is to own a home. So people have made really STUPID decisions about buying a house that they can not afford.
I agree witht he article about renting vs ownership. I have done studies for my job all over the US and in most areas, renting is less expensive than owning (as long as you invest the difference). It does depend on the area, in some metro areas the price increase has been so dramatic that you couldn't beat the return. But in the avg market you are seeing very small appreciations in the last 10 years.

In the rent vs buy argument, if buying is always better why are we having this 'mortgage crisis'?

WOW, I can't imagine spending 9% interest for a home loan and its sheer lunacy to have a loan that might go as high as 30%. There is an underlying stupidity to this whole situation. You find someone who can barely afford their payments on the home and you say, fine, will charge you twice as much. Can you imagine going to a store to buy something and they check your credit rating. Then they charge you a price based upon that rating. If you're poor, you get charged twice as much. And we should give a 50% discount to everyone who is rich. I fully support what the government is doing. They should only be helping those who can afford what they're paying, but to have interest rates climbed to credit card levels is absolutely stupid. Why not just charge everyone the same interest rate? For those who think that higher risk on these houses deserves higher interest, you are just asking the people who are buying it, to fail.

It seems like a lot of people (including, maybe the original article) are missing the point here. The Bush administration doesn't care about subprime homeowners.... it's trying to avoid a disasterous deflationary contraction in the credit markets!
I'm a homeowner and wouldn't have it any other way... but at today's prices in California.... I'd rent and wait.

I agree w/ most of the aforementioned anent a bad idea to bail out stupidity. I do disagree about the rent v. own agon

Bought a home for all cash 15 years ago in the D.C. burbs of Falls Church, Va. even w/ this current housing declination-depression, I've still earned cir. 7%. before inflation. Beats 0% by my simple math.

Oh, by the way, I'm a CFP, investment planner and stockbroker, and nothing historically has ever surpassed the common share. But if ya gotta live somewhere, owning beats the be-Jusus outta payin' rent as ya can paint the home any color ya want plus many other freedoms.

Thanks...........El Fredster

Seems to me that homeowners could actually end up worse off in this proposal. If a homeowner has a $300,000 home and it loses another say, 5% in the next year, they will then be another $15, 000 in the hole. This propsal could actually benefit the mortgage holder since they won't have to take posession of as many declining assets.

Yes, a bailout is bad. Fortunately it won't work. For one, few people will qualify as their rates have already reset. Two, this is purely volunatary for the mortgage industry. When did the mortgage industry last go along with any suggestions? Three, investor's lawyers are already lining up to sue anyone who violates the legal terms of these mortgage-backed securities that loaned all this misused money. The vultures may take flight once again...

If they (the govt) really want to help these folks, maybe they should consider putting a freeze on introductory credit card rates. I don't know the statistics, but I'll guess that the majority of those who are in danger of losing their homes also have a boatload of credit cards they're making payment on too. Those who don't understand compound interest are doomed to pay it.

One other comment should be made about the returns on real estate. Most people own real estate over a period of about 40-50 years. Just because it has done well recently does not maen it will do well over 40 years. I am predicting that real estate will revert to the mean and over the next 10 years homes will not rise one penny, Effectively, I predict housing will lose the equivalent of the inflation rate each year. Three percent inflation over 10 years is a loss of 30%. Most people would try to claim that is not a loss since the price of their home did not fall. But effectively, it did.

When comparing stocks to homes as an investment, #1 You cannot just look back at the last decade or two. You need to go back 50 years. If you do, you will see housing growing at the rate of inflation. No more. Homes are a non-income producing asset and therefore, only appreciate at a rate equal to there abundance or scaricity.

#2 The second mistake investors make is not factoring in leverage properly. Sure you can leversge your 20% down payment with a mortgage which will multiply any gain 5 times. The problem is, your losses will also be multiplied by 5 times (which recent buyers are painfully aware of). People that argue for real estate do not factor in that stocks too, can be leveraged with margin accounts.

Check out Robert Shiller's work on the historic return on housing being 0-1%.

It actually makes a lot of sense, when you think about it. Why should we continue to bid up the price for a home (discounting inflation, of course)? It doesn't generate revenue. It seems like it should be tightly constrained by incomes and reflect the pct of incomes people are willing to dedicate to their home. That amount might increase somewhat as disposable incomes increase.

Anyway, we sold in '06 and are happy to rent. If you look at the historic ratio of prices to rents, it's incredibly out of line. So now we're paying rent on our house instead of paying rent on our money (i.e., a mortgage). We're going to look at buying again when the historic ratios revert to the mean.

The so called mortgage bailout is really not a feasible plan. First, the starting date for Jan 2005 would have rates that were reset in jan 2007. My rate just reset Dec 2007. So the plan is to start Jan 2008 where rates start. For a 2/28 the real start date is jan 2006. One year of smokescreen. Now the period is shorter. I believe this is a ploy to stall HR 3609 which is fair to the consumer.

Where in heck do you live??In NH with rents at the low end of $1000 for a trailer to $1500-$3000 and up for house.Rents in apts. not much better $700 for a 1 bedroom and up from there1!!And with a mortgage being tax deductable and rent just burned.How do you figure its
better?? I'm sure unless you are THE BEST at stocks you can't beat house price increases for return of investment

Alright already! Rip the band-aid off and deal with the short term pain. If someone can't afford a house, then they lose it, irregardless if they were duped by the lender or not. NO stretching out the payments, delaying the ARM adjustments, enabling the people who didn't manage their money and had to have new cars every two years.
Deal with it. Don't enable the equivalent of alcholics.

The US government is killing us with kindness and financial guidance. First I was told/thought we each had a Social Security account that would pay us back after 40 years of savings/investing. POOF !!!
Now they want to help us out with our house. Given their track record, now, at the end of only 5 years, I'll have a house? POOF !!
After buying into this latest 'deal' from the government, I'm afraid it will leave us with two bad experiences and zero.
Is this what is called discounted cash flow/present value?
If you really want your house go talk to the bank and work out a deal that's good for you. Otherwise, start renting and start investing on your own!

The grim reaper shall come and the vultures shall prey. I am a vulture with a, predominantly, international emerging markets securities bent. The emerging markets sector produces most superior returns when thoroughly diversified (outside of domestic and internationally developed nations - I do hold 30% here) and the government , perhaps unwittingly, supports international investing for the savvy as the value of the dollar, compared to international assets and currencies, drops no thanks to ?government issued? bail-outs and social programs that heap debt onto our already hemorrhaging fiscal state of affairs. We certainly do make the beds we sleep in.
Trustee

Most of the people in this mortagage mess did not understand the time value of money before they got into these teaser rates. Their job salaries did not grow anywhere near what they thought in five years to take care of the real rate now approaching. Now it is the time to pay the piper or get out. The freeze won't help these people. Their salaries won't grow enough in a recession and they will lose their jobs also. It is a shame.

Shouldn't every American be afforded the same noncontingent walkaway that 'Sir Donald Trump' got years ago when he overwhelmed the banks to such an extent that they couldn't force his hand lest they go down as well. Isn't it the same move we've been teaching Americans for 50 years now...you don't need to worry THEY'LL take care of you.

Smart Money has historically favored stocks ahead of real estate. The truth is that, for the majority of the population who have lived in one of the sought-after locations (the major metro cities, the coasts and the southwest), real estate inflation - even allowing for the early nineties correction and the recent cooling - has far outweighed stock returns. The supposed zero return after inflation is simply not true. It is not even close. If I invest $100 in stocks that appreciate 7%, I make $7. If I invest $100 as a 20% down payment in real estate and finance the remaining 80%, the same 7% appreciation on the total purchase price earns me $35, since my loan remains the same. True, I pay mortgage interest, but that is generally the same as what I would pay in rent. And I have to live somewhere - I can't live in a mutual fund.

Should the FED take blame for this current Housing and Mortgage mess? Don't you think they saw this crisis coming 5 years ago when everyone was jumping on these 5 year ARMs? Don't you think they knew that these rates would be going up significantly when everone took them out to buy a home?

I didn't comment directly on the bailout in my previous post - I'll jump in to the pile again. The Bush plan (as I understand it) applies to subprime loans taken out starting Jan '05, and the plan includes criteria on the person's ability to afford the mortgage at the reset rate. Not sure about all the specifics, but the issue is well known and will be heard all day: the government is telling us that we can be bailed out anytime we get stuck financially when could have avoided it. Will this really prevent a recession?

also, if the author is so bent on saving money and investing the maximum, why not wear only one set of used clothes, eat only bread and drink only water, walk everywhere, and generally be a pauper. why?, because there is more to life than frugality. there is more to life than debt to income ratio's and growing rich. People who aren't there yet usually seem obsessed with it. When you get there you realize that wealth takes on a different meaning. Your home, and your life, is more than a ROI. The most important things in life aren't things. Learn that, and you will be wealthy enough.

What about relief for all of the homeowners who bought a home using a 5 year ARM 4-5 years ago? They are facing a reset on their rates coming in the next year. (Bush's plan is only for loans taken out between 2005 and this past July) This solution is all TEMPORARY RELIEF for a LONG TERM BIG problem. Housing prices are in for a long term downward trend over the next 10 years. This plan needs to be revised...

here is what you fail to mention. Aside from leverage, fixed house payments are locked in, therefore the payment is inflation proof. a $300 house payment in 1977 was normal, today it seems small. Todays $1,500 house payment will seem small in 2037. Your rent will increase with inflation. In 2037, I will live free of payment, you will have a $5,000 one. It's ok, you'll get it someday.

'Zero-growth asset'? Stepping back from the mortgage bailout for a second... I think the author seriously underestimates the medium to long-term returns on home ownership, regardless of whether he considers one's home an asset. The fact that Jack rents does not mean he has more to invest elsewhere - it's the fact that he chooses to pay a LOWER rent that gives him more room to invest (in assets where the returns are based on longer-terms BTW). Still, that rent has yet to earn any equity for him. Keep in mind that real estate appreciates differently in any neighborhood. Home prices might be overinflated in areas (perhaps in Jack's neighborhood in New York City), but a smart home-buyer who does his homework and buys within his means can do much worse than to OWN his own abode... and when times are right, an investment property. 'Zero-growth asset'?

bailout is bad for homeowners. they should be responsible for their own problems. As for renting vs. buying, you are a bit off. You assume a rate of return on the full amount (home price) but most people do not pay cash, they borrow, therefore their leverage usually amounts to a 10:1 benefit (10% down). Homes appreciate at 4%/yr, but you earn 40% on your investment, plus interest deduction. Owning usually equates to living for free. Owning will outperform investing over 30 years IF there is a mortgage by nearly double.