Mortgage Payments should be Indexed to the Value of the Home

[kernals12]

For most people, a mortgage is, by far, the longest duration loan they will ever take out. In 30 years a lot changes; the general price level rises thanks to inflation, your earnings increase the longer you're in the workforce, and an expanding economy increases land values, but the payment amounts remain the same.

This means that the cost of buying a home are heavily frontloaded, real payments are highest when your income is at its lowest and reach their lowest in your peak earning years. MBS owners also bear a risk of unexpected inflation, such as happened in the last 4 years, lowering the real value of the loan payments, and so they charge higher interest rates to reflect that.

It also means that borrowers bear all of the risk of decreases in property values. 15 years ago, when very large numbers of people were foreclosed on, they remained in debt even after the house had been sold, as the value of the home was less than the face value of the loan.

The flip side is that borrowers bear all of the reward from increases in property values. And the prospect of that drives people to use shady, even illegal tactics. During the 2000s housing bubble, out-of-state investors were getting Arizona license plates so that they could pretend they were buying homes as primary residences rather than investments, allowing a lower interest rate. It also means that housing shortages, such as the one occuring now, means that borrowers see their net worth go up, making them likely to vote for politicians who pass laws that restrict the supply of housing, creating great welfare losses.

All of this can be solved by tying principal and interest amounts to the value of the property. To eliminate the incentive for borrowers to neglect maintenance to lower their mortgage payments and for administrative simplicity, it would be best to use an index of regional home prices to be adjusted annually.

The frontloading of costs is greatly reduced as inflation-induced home price increases also increase payments, keeping them constant in real terms and actually increasing them as land values generally rise faster than inflation. Inflation risk to the lender is eliminated, allowing lower interest rates.

Because, by definition, borrowers would never be "underwater", the default rate is reduced by half in one study.

The obsession people have with increasing their property values would also be reduced. The rent-seeking practices of land speculation and house flipping would be curtailed. Voters in communities who support restricting the supply of new housing would be punished by higher mortgage costs.

[Max Rockatansky]

All this critique from the "non-home owner" is fascinating...

[Rothman]

That's our kernals...

Buyers bearing all the risk for their purchases?  The horror...

[Scott5114]

It also means that borrowers bear all of the risk of decreases in property values. [...]

The flip side is that borrowers bear all of the reward from increases in property values.

This is what is referred to in game design as "game balance".

[tidecat]

This is a terrible idea.

The biggest risk is that the value of the home rises faster than one's income and the borrower can no longer afford the payments.

If the value of the home decreases, the bank doesn't make as much, or possibly loses money on the loan, so the bank eventually quits writing mortgages. Eventually the only people who buy houses are the ones who can afford to pay cash. This also bleeds over into new home construction, so now people start losing construction jobs.

The problem of "front loading of costs" also really isn't a problem. If a borrower takes out a loan and agrees to pay $1,000 per month for 30 years, their cost may be higher in real terms due to inflation, but the nominal cost is the same throughout the life of the loan. The only thing that changes for the borrower is how much interest can be deducted for tax purposes, assuming the borrower can itemize deductions at all.

Remember: banks make money off your debt, not your repayments.

The "obsession" with rising property values isn't going away either. If you could spend a few thousand dollars on your home and get tens of thousands of dollars in return when you sell, why wouldn't you?

Also, house flipping isn't actually a rent-seeking activity. Renovating a house adds real value to the home either in improved comfort, safety, or both. You can argue about whether or not that additional value is priced fairly, but if it isn't, the market responds by the property not selling quickly.

If you want to get rid of land speculation, implement a land value tax. Those who hold land waiting for future development would have no incentive to do so and sell to the actual end user.

[Road Hog]

I got a 6% mortgage 20 years ago. I looked into a refi when the rates bottomed out but the banks either turned me down or made me jump through more hoops than I wanted to go through, so I stuck it out. Glad I did. I paid ahead on principal early on and in a few years I will be debt free.

Bad thing is the Texas property taxes by that time will be like paying a monthly mortgage, so I will either be renting or moving out of state.

[kernals12]

The biggest risk is that the value of the home rises faster than one's income and the borrower can no longer afford the payments.

If that happens, the bank forecloses, sells the home at its higher value, and they still make money. Today, mortgage default rates generally go up when property values decline and investors don't recover all of the loan.

If the value of the home decreases, the bank doesn't make as much, or possibly loses money on the loan, so the bank eventually quits writing mortgages. Eventually the only people who buy houses are the ones who can afford to pay cash. This also bleeds over into new home construction, so now people start losing construction jobs.

Home values are far less volatile than stock prices, but people still invest in the latter.

If you want to get rid of land speculation, implement a land value tax. Those who hold land waiting for future development would have no incentive to do so and sell to the actual end user.

People really, really hate property taxes

The problem of "front loading of costs" also really isn't a problem. If a borrower takes out a loan and agrees to pay $1,000 per month for 30 years, their cost may be higher in real terms due to inflation, but the nominal cost is the same throughout the life of the loan. The only thing that changes for the borrower is how much interest can be deducted for tax purposes, assuming the borrower can itemize deductions at all.

The whole point of credit is to smooth out differences in one's income. The present fixed payment mortgage means that payments are much higher as a percent of income at the beginning then at the end.

Buyers bearing all the risk for their purchases?  The horror...

Except that the purchase isn't really theirs until they pay it off after 30 years.

[kalvado]

Is it about balloon payment?

[SEWIGuy]

So if I buy a house in an area that suddenly booms, my mortgage payments would increase, and the bank would make more money? How on earth is that a good idea?

In reality what would happen is that people would be forced out of their homes.

[kernals12]

So if I buy a house in an area that suddenly booms, my mortgage payments would increase, and the bank would make more money? How on earth is that a good idea?

In reality what would happen is that people would be forced out of their homes.

And if you live in an area that suddenly tanks, your mortgage payments would drop.

[kalvado]

So, how do you view mortgage in general? Right now, it's a loan with certain financial terms - interest rate, payoff period etc. Real estate component is just backing the loan for bank's "peace of mind". Risks of property ownership are still on a borrower, abet insurance is required.
You propose to tie in real estate much deeper into the equation. Can you describe full legal framework? What are the right of the bank in this scheme?

[SEWIGuy]

So if I buy a house in an area that suddenly booms, my mortgage payments would increase, and the bank would make more money? How on earth is that a good idea?

In reality what would happen is that people would be forced out of their homes.

And if you live in an area that suddenly tanks, your mortgage payments would drop.

So? I don't think the bank should be short-changed either.

[kernals12]

So, how do you view mortgage in general? Right now, it's a loan with certain financial terms - interest rate, payoff period etc. Real estate component is just backing the loan for bank's "peace of mind". Risks of property ownership are still on a borrower, abet insurance is required.
You propose to tie in real estate much deeper into the equation. Can you describe full legal framework? What are the right of the bank in this scheme?

It would turn mortgages into a more equity-like product, the value of them would rise and fall with the value of the underlying asset.

If a borrower defaults, then the bank forecloses, sells the house and makes a profit or loss equal to their share of the equity. 

[SEWIGuy]

So, how do you view mortgage in general? Right now, it's a loan with certain financial terms - interest rate, payoff period etc. Real estate component is just backing the loan for bank's "peace of mind". Risks of property ownership are still on a borrower, abet insurance is required.
You propose to tie in real estate much deeper into the equation. Can you describe full legal framework? What are the right of the bank in this scheme?

It would turn mortgages into a more equity-like product, the value of them would rise and fall with the value of the underlying asset.

If a borrower defaults, then the bank forecloses, sells the house and makes a profit or loss equal to their share of the equity. 

A mortagage should not be an "equity like product." A house should be. A mortage is just a loan.

[kernals12]

So, how do you view mortgage in general? Right now, it's a loan with certain financial terms - interest rate, payoff period etc. Real estate component is just backing the loan for bank's "peace of mind". Risks of property ownership are still on a borrower, abet insurance is required.
You propose to tie in real estate much deeper into the equation. Can you describe full legal framework? What are the right of the bank in this scheme?

It would turn mortgages into a more equity-like product, the value of them would rise and fall with the value of the underlying asset.

If a borrower defaults, then the bank forecloses, sells the house and makes a profit or loss equal to their share of the equity. 

A mortagage should not be an "equity like product." A house should be. A mortage is just a loan.

Any financial advisor will tell you that you need to have a diverse portfolio. Having hundreds of thousands of dollars tied up in a single asset is not a diverse portfolio.

[SEWIGuy]

So, how do you view mortgage in general? Right now, it's a loan with certain financial terms - interest rate, payoff period etc. Real estate component is just backing the loan for bank's "peace of mind". Risks of property ownership are still on a borrower, abet insurance is required.
You propose to tie in real estate much deeper into the equation. Can you describe full legal framework? What are the right of the bank in this scheme?

It would turn mortgages into a more equity-like product, the value of them would rise and fall with the value of the underlying asset.

If a borrower defaults, then the bank forecloses, sells the house and makes a profit or loss equal to their share of the equity. 

A mortagage should not be an "equity like product." A house should be. A mortage is just a loan.

Any financial advisor will tell you that you need to have a diverse portfolio. Having hundreds of thousands of dollars tied up in a single asset is not a diverse portfolio.

But you are suggesting that it would be better to create more uncertainty around that asset because you don't know what it will ultimately cost you. You are suggesting that people should commit to paying for an asset for as much as 30 years without any knowledge of the true cost of that asset when you make that commitment.  No financial advisor would think that is a good idea.

And you are also overlooking the fact that part of why you take out a mortgage is because you are paying for a place to live.

This is just a really bad and impractical idea.

[Rothman]

The short period of little nonsense on the forum we had was quite pleasant.  I feel naive in my previous belief (however accidentally adopted) that a return to crap like this was not inevitable at some point.

[kernals12]

So, how do you view mortgage in general? Right now, it's a loan with certain financial terms - interest rate, payoff period etc. Real estate component is just backing the loan for bank's "peace of mind". Risks of property ownership are still on a borrower, abet insurance is required.
You propose to tie in real estate much deeper into the equation. Can you describe full legal framework? What are the right of the bank in this scheme?

It would turn mortgages into a more equity-like product, the value of them would rise and fall with the value of the underlying asset.

If a borrower defaults, then the bank forecloses, sells the house and makes a profit or loss equal to their share of the equity. 

A mortagage should not be an "equity like product." A house should be. A mortage is just a loan.

Any financial advisor will tell you that you need to have a diverse portfolio. Having hundreds of thousands of dollars tied up in a single asset is not a diverse portfolio.

But you are suggesting that it would be better to create more uncertainty around that asset because you don't know what it will ultimately cost you. You are suggesting that people should commit to paying for an asset for as much as 30 years without any knowledge of the true cost of that asset when you make that commitment.  No financial advisor would think that is a good idea.

And you are also overlooking the fact that part of why you take out a mortgage is because you are paying for a place to live.

This is just a really bad and impractical idea.

I linked to a study showing that this kind of mortgage would *halve* the number of foreclosures.

[JayhawkCO]

And reduce by 75% the amount of people willing to build a house since they wouldn't have any idea how much it would cost in five years.

[SEWIGuy]

So, how do you view mortgage in general? Right now, it's a loan with certain financial terms - interest rate, payoff period etc. Real estate component is just backing the loan for bank's "peace of mind". Risks of property ownership are still on a borrower, abet insurance is required.
You propose to tie in real estate much deeper into the equation. Can you describe full legal framework? What are the right of the bank in this scheme?

It would turn mortgages into a more equity-like product, the value of them would rise and fall with the value of the underlying asset.

If a borrower defaults, then the bank forecloses, sells the house and makes a profit or loss equal to their share of the equity. 

A mortagage should not be an "equity like product." A house should be. A mortage is just a loan.

Any financial advisor will tell you that you need to have a diverse portfolio. Having hundreds of thousands of dollars tied up in a single asset is not a diverse portfolio.

But you are suggesting that it would be better to create more uncertainty around that asset because you don't know what it will ultimately cost you. You are suggesting that people should commit to paying for an asset for as much as 30 years without any knowledge of the true cost of that asset when you make that commitment.  No financial advisor would think that is a good idea.

And you are also overlooking the fact that part of why you take out a mortgage is because you are paying for a place to live.

This is just a really bad and impractical idea.

I linked to a study showing that this kind of mortgage would *halve* the number of foreclosures.

Right. Because it would reduce the number of people who would apply or would qualify for a mortgage.

Furthermore I think reducing foreclosures, which aren't much of a problem, shouldn't be the ultimate goal of our mortgage policy.

[jeffandnicole]

So, how do you view mortgage in general? Right now, it's a loan with certain financial terms - interest rate, payoff period etc. Real estate component is just backing the loan for bank's "peace of mind". Risks of property ownership are still on a borrower, abet insurance is required.
You propose to tie in real estate much deeper into the equation. Can you describe full legal framework? What are the right of the bank in this scheme?

It would turn mortgages into a more equity-like product, the value of them would rise and fall with the value of the underlying asset.

If a borrower defaults, then the bank forecloses, sells the house and makes a profit or loss equal to their share of the equity. 

A mortagage should not be an "equity like product." A house should be. A mortage is just a loan.

Any financial advisor will tell you that you need to have a diverse portfolio. Having hundreds of thousands of dollars tied up in a single asset is not a diverse portfolio.

To diverse the portfolio, someone can buy more housing in areas of increasing crime and decay. The more boarded up housing, squatters and drug dens, the better.

[Max Rockatansky]

That's what my brother did in Indianapolis.  I kept calling him a slim lord for years after he sold.  Can't deny the fact that he made some money off of, even though it was a questionable act.

[jeffandnicole]

That's what my brother did in Indianapolis.  I kept calling him a slim lord for years after he sold.  Can't deny the fact that he made some money off of, even though it was a questionable act.

If they have some insight into the future and can see an area that may gentrify, they can make some money.  But in the meantime, they just hope their asset isn't destroyed.

[JayhawkCO]

And reduce by 75% the amount of people willing to build a house since they wouldn't have any idea how much it would cost in five years.

The only thing that's certain in life is death and taxes. By taking away much of the potential profits from speculation, this type of mortgage should dampen changes in home prices.

Why is that a good thing? I'm not exactly a capitalism absolutist, but appreciation in and if itself is not something to avoid.

[kernals12]

And reduce by 75% the amount of people willing to build a house since they wouldn't have any idea how much it would cost in five years.

The only thing that's certain in life is death and taxes. By taking away much of the potential profits from speculation, this type of mortgage should dampen changes in home prices.

Why is that a good thing? I'm not exactly a capitalism absolutist, but appreciation in and if itself is not something to avoid.

It is something to avoid if you're a first time homebuyer who doesn't have an existing house to sell at an inflated price to finance the purchase of another one.