Quick Thoughts on Mortgages

We all know that one of the major causes of the current economic situation is the decline of home values and the subsequent turmoil this reigns upon the financial system. I'm not going to quote any numbers here or research. If you want to read more details, then go read this.

I just wanted to share a few quick thoughts on this tonight while I'm thinking about it. The idea of home ownership and a mortgage has become incongruous with the natural evolution of the concepts. Home ownership used to mean just that: home ownership. While many people today still purchase a home for the purpose of long-term ownership, there are still many others who have no intention of truly owning the home for a lifetime (or at least a generation). I can say for a fact that the first two houses that I "owned" were never intended to be my home for any more than three to five years. I'd be somewhat surprised if I stay in my current home for more than seven years.

Mortgages are generally structured on a thirty year payment plan. Think about that for a second: thirty years! This loan structure is not natural for banks. Who would want to loan out money and have to wait thirty years to be paid back? We discussed this a while back when looking at Fannie Mae and Freddie Mac. The development of the secondary mortgage market allowed banks to make thirty year loans. The only reason that this happened is because the government wanted to create an environment more conducive to home ownership and thirty year loans helped spread repayment out over time keeping monthly payments relatively low.

This method of spreading out payments is done to keep home ownership rates high in the U.S. This essentially creates rates which are competitive with rent. As long as there is a healthy secondary market for mortgages, lenders have it in their best interest to create more exotic mortgages which enable lower monthly payments. With Americans viewing mortgages as housing rental plans with all the benefits of ownership (pride, ability to decorate and improve as desired, tax deductions on mortgage interest), both borrowers and lenders are more than happy to find ways to keep payments low. Think about it, for most people under forty in urban and suburban neighborhoods, home ownership is simply just glorified home renting.

So, I feel like I need to come to some conclusion here. Well, there is not a grand conclusion. Ownership has its privileges. I don't know if I'd be happy renting a home where I have to answer to a landlord when it comes to how I want to paint or otherwise improve the property. In fact, this allows me to take advantage of the improvements when I sell the house. But, doesn't that mean that I also have to take the downside risk of losing value? If I want to live in a house and be protected from a loss in value, then should I really benefit from an increase in value?

Now, there are certainly people who intend to live in a house for most of their lifetime. For them, the ups and downs in market conditions are immaterial. If and when they sell, it is after many years - and they probably own the property outright. It seems to me that this situation calls for one type of mortgage. People who only intend to rent with the benefits of ownership should probably have a different type of mortgage - one which more closely resembles rent, allows for the individual to make modifications to the property, yet protects the borrower from downside risk (while limited upside gains).

I'll give this some more thought... but, it seems to be that the mortgage industry needs to revisit its assumptions and the value proposition to the consumer. Low monthly payments can't be the only goal of a loan. We have learned that downside risk exists for property value which makes the grand idea of ownership a much scarier concept.