May302016

Homeownership is no longer the American Dream

Americans now confuse renting money from the bank for true home ownership.

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“The system of banking we have both equally and ever reprobated. I contemplate it as a blot left in all our Constitutions, which, if not covered, will end in their destruction, which is already hit by the gamblers in corruption, and is sweeping away in its progress the fortunes and morals of our citizens. Funding I consider as limited, rightfully, to a redemption of the debt within the lives of a majority of the generation contracting it; every generation coming equally, by the laws of the Creator of the world, to the free possession of the earth he made for their subsistence, unencumbered by their predecessors, who, like them, were but tenants for life.”

Thomas Jefferson

California borrowers created a culture of maximizing and servicing debt that makes them tenants for life. Thomas Jefferson would not recognize the concept we routinely accept as “ownership,” but he would have recognized the corruption of our lending gamblers sweeping away the fortunes and morals of our citizens.

A Conceptual History of Real Estate Ownership

In a pioneer society, people stake claims to real estate by using it. If property fails to produce food (income) and provide shelter, it has no value. Canadian and Siberian tundra is a modern pioneer expanse of thinly populated land of little value. On the frontier, owning is occupying land and making use of it.miss_HELOC_money

Most pioneers live on a subsistence level, but increased settlement fosters a division of labor and fewer subsistence farmers. By necessity ownership becomes more complex as people enter into agreements where they exchange stored wealth (money) for shelter. Increased complexity requires government to maintain order. Bureaucrats keep ownership records, collect taxes, and ensure all encumbrances on land are dutifully noted.

Ownership is a special right of ongoing use, whereas rental is a contractual right of finite use followed by a reversion to owner. In societies of inherited multi-generational wealth, real estate is the best vehicle for transferring wealth because it provides a perpetual cashflow. With exception of low-yield savings accounts, no other asset class provides this feature.

One of the key features of true ownership is a lack of encumbrances. The more restrictions a property has on it, the smaller the bundle of rights an owner controls. For instance, if you pioneer a property in Northern Canada, nobody is going to review and approve your cabin’s front elevation or limit your exterior color choices as they will in a planned community in the United States. We give up many individual freedoms for the harmony of society, and the ever-dwindling bundle of property rights is among them. Historic properties are at the extreme as owners often feel as if the property actually owns them.

One of the most common encumbrances on property is the mortgage lien, and it is among the most restrictive. For instance, if a property not encumbered with a mortgage lien, the owner could demolish any structures on the property (within legal and practical constraints) and nobody would care; after all, it’s their property. Once a property is mortgaged, the “owner” no longer has the right of demolition because a lender obtains a claim to the real estate and needs to preserve its value. In fact, the lender will even require a borrower to carry insurance to prevent loss. If the lenders is not the owner, how can they require insurance, and why do they care?

Lenders want to protect the value of their collateral, the property they may force sale of at auction. At a public auction, the lender, standing in first lien position, bids the property up to their outstanding balance in an attempt to regain their loan balance from a cash buyer. If the house is worth less at auction than their loan balance, lenders often buy the property at auction and sell in the resale market were prices are usually 15% higher. In short, through a complicated chain of events, lenders know the collateral may become their house, so lenders force borrowers care for collateral as if the lender owned it even though the lender doesn’t…pioneer_checklist

legally…

Hey, if it walks like a duck and quacks like a duck….

Since lenders behave like owners of a borrower’s real estate, and since lenders have right to force sale if a borrower defaults, lenders are owners, and owners are money renters.

“That we are overdone with banking institutions …, that these have withdrawn capital from useful improvements and employments to nourish idleness, … for the emolument of a small proportion of our society who prefer these demoralizing pursuits to labors useful to the whole, the peace of the whole is endangered and all our present difficulties produced, are evils more easily to be deplored than remedied.”

Thomas Jefferson

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Money Rentership (Loan Ownership)

Over the years, the slow erosion of property rights blurred the distinctions between owning and renting, particularly in renter-friendly cities in California. Owners possess few rights renters don’t, and with exception of equity participation, owners obtain few benefits to outweigh the burdens of ownership. And during periods when real estate values decline, equity participation is not a bonus.

The mortgage encumbrance drills to the core of the unnoticed change in people’s concept of property ownership; people who have little or no equity stake in a property have no ownership despite what legal documents may say. What they have is money rentership and the illusion of home ownership. Emotionally, they still feel like homeowners; they still behave and believe like homeowners, but they’re not home owners. They own a loan; they’re loan owners.children_want_smaller_mortgage

At some level, people know this, and we observe high default rates once borrowers fall underwater. Despite the Government’s best efforts, people walk away because once they no longer own, they see money rentership for what it is, and unless the cost is less than a comparable rental — which it rarely is — then people walk.

The California concept of home ownership devolved into money rentership — the antithesis of owning. Ownership implies freedom while loan ownership delivers slavery. Californians deliver themselves into money rentership each day, often with no hope or plan to ever retire the debt they assume.

True ownership only comes through retiring debt. I suggest using accelerated amortization, and shortening your time to payoff. Realizing the real American Dream means abandoning debt addiction and California kool aid.

“Educate and inform the whole mass of the people… They are the only sure reliance for the preservation of our liberty.”
Thomas Jefferson

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