‘Liars’ Get Last Laugh?

I was hoping last week’s column regarding the real estate market would be my last for a while. I wrote about the “liar loans” that allowed people with no money down to puff up their incomes to get larger home loans than they could afford.

Lenders did not verify anything, including whether home buyers were even employed. These same people are now starting to lose their homes to foreclosure.

To the rescue to all these poor “uneducated” people is none other than Senate Majority leader Harry Reid (D-Nev.) with Senate Bill 2636, “Foreclosure Prevention Act of 2008.” Reid thinks these people just did not understand what they were signing.

This bill would reward everyone who took out Liar Loans. If passed, it, among other things, would allow bankruptcy judges to lower the principal and interest payments on a home loan to the amount the borrower could now afford based on their income when they filed for bankruptcy.

Lets look how this would affect two couples who were looking to buy a home in Orange County. Both couples went house hunting in Costa Mesa in the summer of 2006.

First we have Jane and Joe Liar. The Liars got a no-money-down loan to buy a 2,500-square-foot home in Costa Mesa for $850,000. On the Liars’ non-verified loan application they stated their income was $11,200 per month.

At least it had been for the last six months. Both Joe and Jane were in sales and with the economy humming along their commission checks were higher than normal. Their 4% adjustable- interest only loan payment was $2,834 per month. With taxes of $850 their total house payment was $3,684 month.

The other couple; Bill and Sarah Doright, were also looking for a home in Costa Mesa. They too were in sales and the humming economy also shot up their incomes.

Some months, with help from large commission checks, they also made $11,200 per month. The couple also saved $45,000 over the last four years by not eating out, forgoing expensive vacations and continuing to drive their eight-year-old cars.

Their lender verified their average income over the last two years and even though they wanted a single-family home they were only qualified to buy a 1,100-square-foot condo for $450,000; which they did. Being on the conservative side they put down $45,000 and got a 30-year 6% fixed loan for $405,000. The loan payment was $2,135, and with taxes and association dues their total house payment was $2,735 per month.

Now let’s fast forward to January of 2009. Barack Obama is sworn in as president, and he signs the “Foreclosure Prevention Act of 2009.” The economy has slowed down, and both the Liars and Dorights are feeling the pinch. Both couples have much lower commission checks and are living off their base salaries. The real estate market has also tanked, and neither couple could sell their homes for what they owe.

The Liars’ adjustable loan goes up to 6%, and they can no longer afford what is now a $5,100-loan payment. No problem. The Liars file for bankruptcy and, lo and behold, because of the Foreclosure Prevention Act, they are saved.

A bankruptcy judge comes to the rescue and reduces their payment to what they can now afford, by lowering the principal on their loan to $395,000. This lowers the loan payment to $1,975. With taxes they are now paying $2,825 per month. A savings of more than $2,000 per month and $455,000 knocked off their loan balance to boot.

Meanwhile the Dorights, who make enough money to make their mortgage payment, continue to make the payments and live in their condo and hope someday to save up enough money to buy a home.

What message does the government give to people like the Dorights, who do not go into debt over their heads and borrow only what they can afford to pay back?

Reckless behavior gets rewarded. And good behavior gets punished.

There is nothing noble in preventing foreclosures. Foreclosures are the market’s way of re-pricing the housing market to what people can afford. The foreclosed homes we see in some neighborhoods with the unkempt lawns won’t stay vacant very long.

Remember: For every family that loses a home to foreclosure, there is another family who buys it at a price they can afford.By the way, lending institutions cannot stay in business if the money they lend out gets reduced by a judge and never gets paid back.

To stay in business, they will just make up their losses by charging higher interest rates to the rest of us. That won’t help anyone.