Responsible homeowners did not lose their homes in foreclosure
Whether or not “responsible” homeowners lost their homes depends on how you define “responsible.”
A common theme in the financial media is that people lost their homes during the housing bust due to unemployment, probably because it’s easier than acknowledging the bad loans and borrower profligacy. During the Great Recession (2008-2009), American businesses terminated more jobs than they created — by a wide margin. More than 7 million people lost their jobs during a two-year stretch. I recently noted that US lenders completed 6,324,545 foreclosures over the last ten years. Does that mean the foreclosures were caused by the unemployment?
To some degree, this is certainly the case. I bought a foreclosure from an unemployed construction worker in Las Vegas. I paid him $1,500 cash-for-keys and sent him on his way. But many, if not most, of the foreclosures were not caused by unemployment.
When people lose their jobs in a dual-income household, often only one of the two spouses loses income, so the family tightens their belts and muddles through the recession. And many obtained loan modifications, a program designed to combat the real cause of the housing bust — unstable mortgage debt and rampant mortgage equity withdrawal.
Many of the sob stories in the mainstream media were focused on who are characterized as “responsible homeowners” in danger of losing their homes. For several years during the recession, I wrote daily posts exposing mortgage equity withdrawal into the millions of dollars. Many astute observers noted the extravagances and poor decisions that often make these homeowners look less than completely responsible. For the most part, responsible homeowners did NOT lose their homes.
To see the truth in this statement, one needs to have a clear definition of “responsible homeowner.”
A “responsible homeowner” is a buyer who, if they utilized financing, did not stray from the conservative parameters set forth by lenders (prior to the bubble) and financial planners. This includes using a maximum 28%-31% debt-to-income ratio on the mortgage, at least a 20% down payment and fixed-rate conventionally amortizing financing.
Few who fit this definition lost their homes; although, some of them chose to walk away from the debt because they were hopelessly underwater. The only ones who fit the above definition who are in danger of losing their homes are those who lose jobs; they are the truly sad casualties of the housing bubble. Unfortunately, it was common due to the financial crisis caused by all the homeowners who borrowed irresponsibly.
Responsible borrowers are not the ones defaulting on their mortgages; irresponsible homeowners are.
If “responsible homeowner” is defined as a buyer who believed they could manage their monthly payment and did so until the loan terms changed, then by this definition, many responsible homeowners did lose their homes.
Almost everyone who signed up for a toxic loan thought they could make the payment; most did for a while. Many were convinced they could make the payments by a predatory lender out to make a few bucks on the origination. Many more believed they could supplement their incomes with the rapid appreciation they would enjoy as their house values rose to infinity. Does ignorance to their inability to sustain their housing payments make them responsible?
In the political debate surrounding foreclosure moratoriums and homeowner bailouts, the political Left embraced the latter definition of “responsible homeowner.” The ignorant and those who knowingly took excessive risk are being rewarded with a government bailout. The prudent paid the bill.
To see the truth in the importance of these definitions, we need to look no further than the astute observations on this blog. One of our frequent commenters is a responsible homeowner. He purchased near the peak, but he did so with terms that his family can afford. He meets the parameters in the first definition. He is in no danger of losing his house in foreclosure. Yes, he is annoyed that the values have dropped–who wouldn’t be–but he is not going to become a foreclosure statistic.
Lenders really worried that guys like him may chose to go into foreclosure and walk away from the debt because there were too many irresponsible homeowners on their way to the meat grinder. A wave of walkaways had potential to make sausage of the entire banking industry.
The reality is responsible homeowners are not losing their homes; some may lose their houses because of a job loss, and some may chose to walk away, but very few truly responsible homeowners were endangered. The foreclosure crisis was caused by the irresponsible.