I read an article by an economics writer for the New York Times about his struggle with paying his mortgage, which is actually an extract from his book about his experiences with buying a home in today’s market. He stated up front that he, among all people, should have known better than to get into a home that was beyond what he could afford. He talks about having been talked into mortgages which did not require statements of income (no document or “no doc” loans) and were not prime rate.

I am in the business and am well familiar with “no doc” loans, adjustable rate mortgages (ARMs) and sub-prime mortgages. All my sales to foreign buyers were necessarily sub-prime, since, to get a prime rate, one has to have the home as his main residence. My foreign buyers do not even live in the USA, much less in homes they purchase here.

Foreign buyers also have to use “no doc” loans. Most are familiar with the credit rating agencies for consumers, you know, the familiar FICO score. These are only available in two countries, the USA and Canada. I test mortgage brokers by asking if they require credit ratings for my non-resident buyers. If they say yes, then I know that the extent of their sales to foreigners is to Canadians. Any loan without a credit score is automatically a “no doc” loan.

But my interest here is not if a loan is a “no doc” or “sub-prime” or ARM or “balloon” or interest-only loan. My reaction to this man’s plight, and that of others like him, is, why are you upset about not being able to keep up with the mortgage? The worse that can happen is that the bank will take the house away. And since you have no money of your own in it, you don’t lose anything.

Let me explain. This man and others like him, bought their homes with no money down by taking out two mortgages, one for the bulk of the cost and another for the down payment. Yes, they have been paying the interest due (actually, in many cases they have not even done this) for the time they have lived in the house. But they would have been paying rent otherwise, so the interest is akin to a cheap rental. If they lose the house, they don’t lose any of their money, since it was acquired with borrowed funds.

I have even less time for those who bought second and third homes to either rent out or for resale or both and now find that selling the homes they bought as investments will not cover the balance due on their mortgages. Yes, the lender will take a hit, but the investor in effect will lose nothing, since he made his investment with borrowed money. As for the complaint that these buyers will lose the interest paid on mortgages for these investment properties, tell them to look at the massive losses to their friends’ and colleagues’ pension funds.

No, I do not like people losing their homes. We should do all we can to help them stay in them. But I have little time for those who bought homes beyond their ability to pay and as investments that turn out to be losses.

Leo Cecchini
May 2009