John W. Lillpop
Heaven knows, no one wants to see
any American kicked out of his or her home. But government bailout of
citizens in foreclosure is yet another punch in the stomach to millions
of Americans who have chosen to live their lives responsibly and within
their financial means.
Given this government’s assumed role as
Uncle Nanny when it comes to home ownership, why in Hades should any
responsible citizen scrimp and save and work hard when those who are
irresponsible can count on being bailed out with taxpayer money?
is the point in being frugal and prudent when it is the foolish and
imprudent who are rewarded?
During the most recent period of
extravagant exuberance in the mortgage industry, several "old school"
traditions have been cast aside in favor of more liberalized
This new paradigm of underwriting has
lead to a new way of thinking, including the following:
Not About Your Credit
It seems as though those who
worry about their credit worthiness are guilty of "old school" hysteria.
these enlightened times, cagey characters do not pay attention to
paying bills on time. They refuse to worry about how much debt they are
ringing up on credit cards that cost 20-30 % annual interest, they fret
not about derogatory items like repossessions, collections, liens, and
judgments that usually muck up one’s FICO
To really cool consumers, having a single-digit
FICO score is vastly overrated as a disaster, especially since Uncle Sam is chopping at
the bit to disburse scores of billions of dollars of funny money just to
extract foolhardy buyers from self-imposed debtor hell.
for a Rainy Day Is a Waste of Time
prospective buyers were told to save enough money to make a decent down
payment on that Dream Home. The idea was to put at least twenty percent
down to avoid mortgage
insurance, and to keep monthly mortgage payments as low as
In addition, having money in the bank was seen as a
sign of economic stability. Some institutions even required several
months of "reserves" for certain loans.
Alas, saving for a rainy
day is another old school concept that should be expunged from the modern home buyers‘
In recent times, it has been entirely possible to get
into a million dollar home with little or no down payment.
the right circumstances, lenders would approve a "piggy back" loan
consisting of a low-interest first for 80 percent of the home value, and
a Home Equity Line of Credit (HELOC) for the remaining 20 percent.
scheme might sound risky, but pompous lenders and naive buyers were
counting on rising home prices to cover such HELOCs in short order. As
an added bonus, the HELOC provided lenders with ready-made refinance
opportunities from which to profit.
But then a funny thing
happened on the way to refinance heaven: Rather than the promised
non-stop increase in home values, the bubble burst, leaving some buyers
in the unenviable position of owing more on their homes than the fair
market value of said homes.
Again, "old school" may not be
cool–but it is often safer!
Buy Most Home Possible Now;
Deal With High Payments Later!
sense should dictate that home buyers should never take on mortgage
payments that will overwhelm them with debt and make their lives life
Requiring at least a twenty percent down payment used
to help keep monthly payments in line. In addition, most lenders used
to adhere to debt-to-income ratios of approximately 28 and 36.
eight percent was the maximum amount of gross income that could be
spent on principle, interest, taxes, and insurance (PITI); thirty six
percent was the amount of income that could be dedicated to total debt
(PITI plus other debt).
Debt to income ratios were designed to
protect buyers from purchasing homes beyond their means.
during the recent run of extravagant exuberance, some lenders have
disregarded the traditional debt-to-income ratios and have sanctioned
total debt ratios in excess of 50 percent, leaving ill-uninformed
borrowers vulnerable to bankruptcy and
One of the cruelest hoaxes
perpetrated on unsuspecting buyers is the outrage called negative
amortization. Simply put, a negative amortization loan is one in which
the principal amount increases, rather than going down, each month.
loan is usually sold to a borrower who cannot otherwise qualify for a
traditional loan. The borrower accepts the loan because of lower
interest rates and easier qualifying requirements, often ignoring
exorbitant closing costs, excessive origination fees, and other unattractive
With negative amortization loans, the monthly payment is
based on an artificial interest rate, whereas the actual monthly payment
is based on a much higher interest rate. The difference between the
artificial and actual monthly payment amount is added to the principal balance each month.
thrill it is to make that monthly payment knowing that the
principal amount has gone up–rather than down!
American people will wise up and avoid the path to financial
irresponsibility and recklessness. The first step is to accept the
simple truth below:
Not all Americans can afford luxury
homes, some cannot afford even the most modest of dwellings.
individual responsibility, not government bail outs, is the solution to
the mortgage and housing