Saturday, March 27, 2010

The long-term impact of the mortgage crisis--and why it keeps me awake

My parent's generation behaved differently than mine in all sorts of ways. A paper of mine with Hendershott shows that they spent less, controlling for education, etc., throughout their life cycle than any other generation. One of the reasons for this is that they paid off their mortgages. According to the American Housing Survey, 70 percent of households headed by someone over the age of 65 have no mortgage at all. Loan amortization became a mechanism for forced saving, and as a a result, those born during the depression are in pretty decent shape financially. A Pew Survey shows that those over the age of 65 feel much more in control of their finances than younger people.

My generation is different. Even under the most benign circumstances, we refinance in a manner that slows amortization. I refinanced in Madison twice to take advantage of lower interest rates--this was, of course, the right thing to do financially. But each time, the amortization schedule reset, and so it extended the period at which the mortgage would pay off. Now yes, one can take the money one doesn't put into home equity and put it in other savings vehicles, but it is not clear that everyone does that. Forced saving is slowed.

But this is not the worst of how people have handled their mortgages. A substantial fraction of borrowers pulled equity out of their houses, putting themselves on a lower savings path even in the absence of falling house prices.

I am going to run some American Housing Survey data on this, but it is hard for me to imagine that 70 percent of my generation will have no mortgage debt when we are elders. My parents' generation has used housing wealth to, among other things, finance long-term care. I hope I am missing something here, but the lack of housing wealth in the future could become yet another challenge as we seek to fund the needs of the elderly.

13 comments:

Austin said...

http://www.nytimes.com/2010/03/28/us/politics/28teaparty.html?hpw

A teaparty activist interviewed by the NY Times says she bought her house in Philly 19 years ago, it has fallen in value $40,000, and she can't sell it for her mortgage balance. Since amortization is about 40% in a 19 year period (interest rate around 7% and 30 year amort) either that was a less than $100,000 house now selling for less than $60,000 (awfully hard to believe in Philly) or, as I suspect, equity take out is playing a major role in her problem. But I guess the equity takeout was really caused by big government, not by her. Why doesn't the press ever ask such elementary questions, like "how did your mortgage get so big relative to your house value?"

Linda said...
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Linda said...
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Linda said...
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Linda said...

I am going to try and get this comment correct this time.

Your articles is great and you are telling it like it is. After working for 30+ years in Mortgage Lending I have seen the good, the bad, and the ugly. Yes, the older folks had it right and this younger generation lives pretty much in the present, without regard for tomorrow and a rainy day and when they get older they will realize that refinancing every time you turn around is not a great idea. If you are adding back the closing cost of 3 to 5%, you are defeating your purpose. If you are not decreasing your interest rate by at least 2% points it is probably not the best thing to do. What you see if greed and yes the Banks and mortgage companies want you to refi because it is a profit for them but does it profit you. If your term shifts back to 30 year amortization but what you gained. If you lower your term and can stand the payment..it is to your benefit as you will be paying more to principal.

The younger generation should start planning for retirement before they get 40 because with the economy as it is, who knows what the future holds. It will be too late for them to start trying to pay off a 30 year mortgage when the are 50, unless they have a 15 year mortgage. Retirement, unless they have planned well, might not be sufficient to live well. You find in the country, people are more conseverative as they know when they retire, funds will be short and of course they buy a house and most of the time stay in that house for a life time.

In the city young people tend to follow the crowd and want to live in the best areas, best schools and they tend to get homes they cannot afford..

I just wrote an articles @ hubpages
http://hubpages.com/hub/Mortgage-Refinance-Is-it-Beneficial-to-You and I also have a mortgage blog....
http://mortgageloanfacts-u-need.blogspot.com/2010/03/mortgage-rules-change.html

The lower term is the best choice and an 80% loan to value...but remember that the average American cannot afford 20% downpayment and therefore they will have MI insurance.

I enjoyed your articles.

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smartbrains said...

If you are adding back the closing cost of 3 to 5%, you are defeating your purpose. If you are not decreasing your interest rate by at least 2% points it is probably not the best thing to do. What you see if greed and yes the Banks and mortgage companies want you to refi because it is a profit for them but does it profit you. If your term shifts back to 30 year amortization but what you gained. If you lower your term and can stand the payment..it is to your benefit as you will be paying more to principal.
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michael09 said...

Remortgaging

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sheena27 said...

A long term mortgage can be very useful under some conditions. For example, if you are preparing on purchasing property with the purpose to remodel it and then re-sell it, this interest rate would actually allow you to reduce your own costs and per month bills while you are restoring it up.

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Gustavo Garcia said...

Great post! This is quite a daunting topic. It appears that the foreclosure crisis is becoming worse each month. The media neglects to cover stories like Austins. Its a shame that people have to relocate because they cannot pay their mortgage. It is a buyers market, as houses are loosing value. Some homeowners aren't able to sell their houses for what they need. I did some research and found a good amount of mortgage companies that assist with these types of issues. american home mortgage servicing inc out business breaks their services down for a more comprehensive experience. I hope we can put this crisis in the past. My heart goes out to the individuals facing these types of situations.