In my last post, I discussed the main points of the recent national mortgage settlement between the top five mortgage-lending banks and 49 states. I have heard some positive remarks about this along with some negative ones. I want to explore both of these points of view.
On the negative side, imagine two home buyers six years ago who bought similar homes in the same neighborhood and each paid the same price – $200,000. One buyer and his family sacrificed for years to save up enough to put a 20% down payment ($40,000) on their house. This husband and wife have done whatever they had to do to continue making their mortgage payment each month. They have gone without vacations some years, cut back on eating out and, for a year, had the cable shut off. They felt paying their monthly mortgage payment was their first priority even though the value of their house is now worth much less than it was when they bought it.
Photo © by 401K
On the flip side, the other couple down the street did not have any savings (and, thus, did not put anything down on their house) but did not want to wait to purchase their house. They took out a no money down, adjustable rate mortgage in order to buy their home. Shortly after they moved in, the economy started to take a nosedive and this couple found it more difficult to continue paying their mortgage each month. Instead of cutting back and making some sacrifices, they decided to just stop paying their mortgage payment.
With this recent settlement, the first couple that sacrificed and made their payments on time get nothing while the other couple that was more reckless will have the size of their mortgage reduced. If this couple has already been foreclosed on, they will get a $2,000 check. If this family has its mortgage reduced, the value of their home goes down. When their home price goes down, so do all of the other homes in that neighborhood – including that of the first mentioned couple. So, the responsible couple who played by the rules gets no decrease in the amount of money they owe on their mortgage and, at the same time, has a less valuable home. Hypothetically speaking, what would happen if a million or so homeowners got so upset by this settlement and decided to stop paying their mortgages until their loans were also lowered by tens of thousands of dollars? I don’t think the end result would be pretty.
I can completely understand this point of view. When we moved to Georgia a few years ago, we could have “qualified” for a much larger mortgage and, thus, bigger house. Tracy and I had specific goals in mind so we did not go this route. We put more than 20% down on our house and have made some sacrifices to have her be a stay-at-home mom and keep current on our mortgage. In essence, we played by the rules. Writing this, I am actually okay with the settlement because I think of what would happen if more people lost their houses. Yes, some people did not think ahead and bought homes they truly could not afford and maybe it is not fair that they get “rewarded” for such behavior – although I am sure many of them don’t look at this like a reward.
I do have to say that I would add one requirement to this settlement. I would make anyone that benefitted from it be required to take a personal finance class. I know some would be upset about having to attend such a class but think it could help those that came in with an open mind. We all make mistakes in life; the important thing is we learn from these mistakes so we do not repeat them. I know there are people out there that would love teaching this type of class (I would jump at this opportunity) and I think it could help those that do not understand the basics of money management.
What do you think? Do you think requiring this type of class would make this settlement an easier pill to swallow for those that disagree with it?
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