Who Owns Your Home?
The banking industry has rolled out yet another product to get people into homes they can't pay for otherwise. But is it worth the public's money?
Morgan Stanley's "Flexishare" mortgages are built so that, if your house goes up in value, the bank owns your home equity up to a third of the house's original value.
Not to knock one of the few products out there that actually helps the middle class manage one of its biggest risks. But as mortgage products stray further and further from the old 30 year fixed, homeownership starts to look a lot more like renting. It's already a little perverse when, to avoid "throwing their money away" on rent, families start throwing even more money away on mortgage interest payments and fees that (if the owner hits a rough patch) never pay down principal. Now comes a product where, even if everything works out great, you'll still never wholly own your own home.
We've got hundreds of billions of public dollars, federally-chartered corporations, and whole agencies all aimed at turning renters into owners. If financing gets even more creative, soon we'll be unable to tell whether somebody actually owns their home (in a way that merits all that support) just because they have what looks like a mortgage.
What kind of homeownership are we getting for all that money? Can we build homeownership policy that incorporates these financial innovations, and also promotes what we had in mind when we started supporting middle class homeowners in the first place? That's the conversation a progressive government should be having about housing.
[--Ed. I should mention that this product is currently offered only in the UK. That said, if it's successful there's no obvious reason for Morgan Stanley not to be offering it in the US.]
The link is to an article from the Financial Times that discusses this product in Great Britain. Is this product already in the US, going to be in the US, or not going to be offered in the US? If not, is that becuase of marketing or regulatory reasons?
The British attitude towards homeownership for the masses is somewhat different than in the US, I am told.
Their attitude towards credit also -- the upsurge in rent-to-own stores in the US is due in large part to British companies pushing rent-to-own in the US in the 1980's. It had been much more common there than in the US.
August 9, 2006 9:11 AM | Reply | Permalink
Home owning is indeed looking more and more like rental. Yet, you get one "benefit" off this type of creative financing : you can deduct your "rental" from your taxable income and let other tax payers foot your tax bill.
As I suspect you pay more to the bank than you would with a rental “owning” property bought at inflated price (because of the creative financing), it is likely that most tax benefits are actually ending up in the banks’ pockets. Just another way to make money of the Treasury...
I don’t how the law is written on mortgage interest deductibility but the IRS should start to look into the details and finer points of those laws. It’s kind of hard to see how those new “loans” square with Congress’ original intent.
As for how to bring lenders back to reality, I’d see only 2 tacks : change bankruptcy laws to make lenders responsible for grossly inappropriate loans and raise reserves requirements. Members of the Sus genus may become airborne much sooner ...
No, you can't have your own facts!
August 9, 2006 5:12 PM | Reply | Permalink
I've had this discussion with my wife numerous times, in reference to renting verses "owning" our home. We do spend more on interest than we would to rent. However, her argument is that after the tax deduction, we are spending less than rent, and we are building equity. Okay, I see that. My argument is that we have locked ourselves into a payment that could ruin us if something were to happen to our income. Also, if the tax laws change, the economics of the tax break could change our finances. We are more vulnerable to financial disaster. She says I'm "doom and gloom".
It is just very difficult for people to see that debt is risky. People don't understand risk until it catches them unaware.
Jim Anderson
The Truth About Credit
August 11, 2006 9:03 AM | Reply | Permalink
The problem isn't so much the lenders (except in the case of truly predatory home financing) it's with the cost of houses, and for that I have to partly blame home owners who see their house a get-rich-quick scheme. When very modest bungalows here in Fort Lauderdale are going for $350,000 (or not going; no one is buying now) and someone is asking $250,000 for a total fixer-upper (just an outside shell; no interior or utilities!) the problem isn't the banks, it's owner greed. Houses were never meant to be investment vehicles, let alone a means of financing one's retirement. The banks are just providing a means so that people can still try to buy a house. The middle class is basically screwing itself on this one.
August 14, 2006 6:37 PM | Reply | Permalink
When one's residential property (or commercial property, for that matter) rises in value, we treat that gain as if it were something we created and are entitled to pocket.
But actually that "appreciation" is not so simple. First, it is a matter of the improvements depreciating (unless we've done a gut rehab!) -- the Federal Reserve Board figures about 1.5% per year for single family residential -- offsetting appreciation of land value.
If the local property tax is 1% of the property's market value, and the property appreciates, say, 10%, one's property tax might rise to 1% of the appreciated value, but the rest of that 10% rise is treated as the landholder's windfall. And under the banner of "property rights" many would fight to the death to say that the landholder is entitled to that.
This system is disastrous. It is the cause of the housing affordability problems we've got, the cost of living problems we face, the virtual necessity of two incomes to afford homeownership or a middle-class lifestyle in most parts of America.
Why on earth, when land values have risen, should a young person have to pay off the previous holder of the land for something that that landholder didn't create? The community created that increase in land value, and a just system would collect it back for the community, as the basis for our public spending.
And mortgage lenders certainly didn't create it, and shouldn't share in the bounty that we all create by our presence.
The FIRE sector is out to own us, and will own our children's generation.
How to fix this?
Simple. Very simple. Tax land value. Don't tax buildings; they're manmade and their value shouldn't be subject to confiscation. Just tax land value. Doing this will not reduce land value at all, but it will bring down the PRICE of land. A lot of societal benefits will flow from this, though the generation which has built home equity (doesn't that sound like muscular work, sweat equity? It isn't. It is mostly reaping a windfall, at least near our big cities, where the land appreciation is) will not be keen on it.
But that generation's children, who have their working lifetimes ahead of them, will benefit hugely, through better opportunities for places to live and places to work and create. They will be able to accumulate something other than home equity, and be able to provide for their own retirements far more than this current generation will be able to. (Mind you, I'm not suggesting we don't need Social Security; I know very well how dependent we are on it as a society. And perhaps part of why we're so dependent on it is that so many people live hand-to-mouth in order to pay the rent or the mortgage.)
But why should mortgage lenders and their shareholders benefit from the natural appreciation of land values? That is legalized theft -- not from the landholders as Jon seems to suggest, but from the commons! Legalizing robbery does not make it any the less unjust or wrong.
This system needs fixing, and the taxation of land value is the right starting point. If we don't do that first, the other reforms will amount to nothing.
lvtfan
http://www.wealthandwant.com ... if you'd like to see an end to poverty
August 25, 2006 9:58 AM | Reply | Permalink