If you owe more on your home than it’s worth, you’re foolish to continue making monthly payments. At least that’s what a San Francisco Chronicle article titled “Are You an Idiot to Keep Paying Your Mortgage” suggested on Sunday.
And here I thought I was being wise all these years taking extra income from my business and paying down my loan balance so as to increase my equity and move closer to owning my home outright.
In the immortal words of Eliza Doolittle, what a fool I was.
The new and improved mortgage strategy, courtesy of the United States government, is to miss three consecutive installments, and have your note restructured for you so that your monthly payment — including principal, interest, tax and insurance — drops to 38 percent of your gross income.
Thirty-eight percent? Maybe that’s the problem?
When I bought my current home in 1999, to qualify for a conforming Fannie Mae loan, this “front ratio” could be no greater than 28 percent. The “back ratio” — which included other recurring expenses such as cars and credit card payments — couldn’t exceed 36 percent of your monthly gross income.
If 38 percent NOT including cars and credit cards is a lower payment for many people, no wonder the housing market’s in so much trouble.
Worse still, this new government program is guaranteed to exacerbate the current crisis as more and more folks do what they need to do in order to qualify, and appraisers assist them in making it happen.
After all, for this to work your loan -to-value must be at least 90 percent. What this means is that appraisers, likely for the first time in history, are going to be under extreme pressure to value properties AS LOW as POSSIBLE.
Imagine that.
This makes for a disturbing self-fulfilling prophecy of home prices continuing to collapse, for the lower values go, the more people will qualify to be bailed out.
Isn’t that special?
But that’s not all, for under this program only the income of the borrower will enter the equation, NOT his or her assets. So, your next-door neighbor with the five cars, the ski chalet, the boat, the RV, and a big-screen TV set in every room doesn’t have to sell off any of these luxury items to qualify.
This means that after all the smoke clears, your neighbor who, since moving in has spent money like a drunken sailor on stuff he couldn’t possibly afford, not only gets to keep all the things your kids wonder why you don’t have, but now your tax dollars will enable him to continue doing so.
And you thought you were the smart one living within your means and only buying items that fit neatly within your budget.
Well, the joke’s on you, for in today’s America, those who practiced the fiscal conservatism they preached are the idiots.
Some lesson for our children, don’t you think?
Noel Sheppard is associate editor of the Media Research Center’s NewsBusters.org. He welcomes feedback at [email protected].
