Tuesday, September 23, 2008

A home: to own, or not to own

Taken from a comment at FP Passport blog.

A key aspect of the ongoing debate about the US economic meltdown is an open question: was it wrong to make home ownership more affordable, by relaxing the standard "20% cash downpayment" rule bankers normally apply? This is really a political question with no easy answers.

If you support increased home ownership, as Dodd and Frank did for decades, you pushed for Fannie and Freddie (and by extension, other banks, because Fan & Fred set the standards) to accept mortgage packages which would finance the downpayment, such as an "80-15-5": 80% first mortgage, 15% second mortgage, 5% cash downpayment. You pushed for Fannie and Freddie to accept borrowers with less than stellar credit.

Proponents would argue that home ownership brings society many benefits, such as stability and investment in the country's future.

But policies that encourage home ownership have flaws that are obvious to us today: Lending standards decline. Increased foreclosures. Owners have far smaller stakes in their property, which means little or no cushion if asset prices decrease. Increased numbers of mortgage-related businesses to sell to, and take advantage of, marginal (read: poor or less-educated) peoples.

Not to mention the obvious environmental cost of increased home ownership, and suburban sprawl.

One of the reasons why the Hong Kong property market is attractive is the traditional "20% cash" downpayment is enforced by banks far more strictly than in the United States. Hong Kong is certainly not immune to asset price bubbles, and property is insanely expensive a la Manhattan, but one can argue that it is a bit more sane in the mortgage loan department than the United States.

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