"The Sky Is Not Falling"

by Greg Mermel, C.P.A.

Published in the "Money and Taxes" column in PerformInk on DATE

It has been brought to my attention that I am obliged to write a column about the current mortgage and housing crisis in order to maintain my standing as a financial matters columnist.

Problem is, so much has been written that finding something new to say is difficult. Worse, what has not been said is, for the most part, BS that is better left unsaid.

Then again, much of what has been said is also BS, heightened with a tone of hysteria and seasoned with the traditional American soupçon of racism.

Old History

The idea of owning land, and one's home, is deeply rooted in the American psyche. The candy-colored version of American history taught in our elementary schools says that the first English settlers came to North America in search of religious freedom (though "tolerance" would be a more accurate word). What followed almost immediately, though, were English farmers displaced by the Enclosure Laws and the Industrial Revolution. They came for the one thing they could never hope to have in England: land of their own. Similarly displaced peasants from the rest of the British Isles and continental Europe followed.

This push for land shaped much of early U.S. history: the Northwest Ordinance of 1787, the Homestead Act of 1862, the idea of Manifest Destiny and so on, till the closing of the frontier was observed by the historian Frederick Jackson Turner in 1893.

Newer History

Our present attitude and policies about home ownership have their roots in the Great Depression of the 1930s, when many people lost their homes due to unemployment (compounded then, as now, by poor lending practices and scanty regulation). Popular literature of the period like The Grapes of Wrath and Gone with the Wind held firmly to the notion:

" Do you mean to tell me, Katie Scarlett O'Hara, that Tara, that land doesn't mean anything to you? Why, land is the only thing in the world worth workin' for, worth fightin' for, worth dyin' for, because it's the only thing that lasts."

It's God-awful writing, but it resonated powerfully with audiences.

Since that time, federal policy has specifically encouraged and subsidized home ownership. The tax-deductibility of mortgage interest and property taxes is a major subsidy. Numerous federal programs have been dedicated to making, subsidizing, guaranteeing, facilitating or otherwise supporting home mortgage lending. Two substantial ones - the Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA) - remain. More important are the two quasi-governmental mortgage funders commonly known as Fannie Mae and Freddie Mac (properly, Federal National Mortgage Association and Federal Home Loan Mortgage Corporation).

A Little Perspective

Bloviating broadcasters know how attached Americans are to home ownership. They also know that screaming "disaster" draws better ratings than stating "worrisome problem to be solved," and hope that "disaster" will become a self-fulfilling prophecy so that they can be seen as correct.

Certainly, many people and many communities have been deeply hurt by the situation, most often the ones trying to claw their ways up the economic ladder. This is why the "blame the borrower's stupid behavior" theme is subtly racist, or at least "classist" (which in the U.S. is much the same thing). And I am not minimizing the personal and economic problems this creates or the need for government intervention to mitigate them.

But I note that the value of one's home generally matters only in three situations: (1) when you're buying, (2) when you're selling, and (3) when you're refinancing. The terms of your mortgage didn't change when property values were rising, and they are not changing now when values are going down.

The overwhelming majority of American homeowners need do nothing but make their same monthly payment. Traditional fixed-payment mortgages are still the largest portion of existing loans.

Similarly, many adjustable rate loans (mine, for instance) were made without artificially-depressed initial interest rates. Mortgage interest rates remain low by historical standards, so if the rate changes soon, the payment increase is more likely to be a speed bump than the proverbial brick wall. And many (again, including mine) have several years to go before the next rate change.

And If It Does Matter...

Part of the problem in today's market is that every participant - buyers, sellers and lenders - is hesitant due to uncertainty.

Buyers hesitate to buy for fear of looking like chumps if prices drop further. To them I say, waiting for the bottom in home prices is like waiting for the bottom of the stock market. You won't recognize the bottom till it has passed.

Sellers hesitate to sell (unless forced by job loss, transfer or imminent foreclosure) because it makes the loss in value concrete. That unwillingness to accept a loss, the irrational hope for a rebound, is why I see some clients still holding tech stocks that have been near-worthless since the late 1990s.

Lenders hesitate to lend because they are not sure how much they have already lost. Their statistical models to predict loan losses have been proven invalid, especially when they own pieces of loans through monstrously-complex collateralized debt obligations. But they have to lend to stay alive, just as we have to breathe. Accordingly, they act as we would when walking through a cloud of foul air: hold your breath as long as you can, and take short, shallow breaths till it is over.

Lenders don't listen to me, but I can offer advice to the others.

If you are ready to buy and find a place you really like, go ahead. Loans - even those with very low down payments - are still available to those with really good credit, or to those with above-average credit and a decent down payment.

If you need to sell, go ahead. The operative phrase is "cut your losses." It may be painful, but it's only money. (Your health might even improve from the stress reduction.)

And above all, remember who brought you this economic mess when you vote in November.

Free Offer

Every year during the income tax season, I offer free copies of my “Checklist of Potential Deductions...” for those in the arts. Just call my office, or send an email to checklist@gregmermel.com.

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