The Cost of Former Treasury Secretary’s Plan to Prevent Foreclosure
Paul O’Neil, former Bush Treasury Secretary, proposed a solution to prevent foreclosure crises in the future. His comments were featured in National Realty News. [Thanks to Tim Iacono's blog post.]
His solution? Require 20% down payments on all home loans.
While I agree that this would certainly cut foreclosure rates at the knees, let’s take a look at the implications.
I deal with household budgets every single day, so let’s put together the numbers for an average American household.
We’ll assume a 4-person household, earning the 2007 median income of $50,233. They take home about $3,264. Here are their numbers…
[Sorry- I'm not a very good "blogger." Right-click the link below and choose "Open Link in New Window" so you can follow along with the numbers]
How Do We "Prevent Foreclosure" with These Numbers?
Note that this assumes that all of their health care costs are paid for by their employer (or should we pretend that they don’t have any?)
There’s also no line item for things like clothing and extra-curricular activities.
Any costs such as these, Christmas gift-giving, auto repairs, reductions in income due to slow-downs, shut-downs, temporary lay-offs sickness or injury, plus any other unexpected expenses, all must be covered by the surplus.
And, of course, the savings for their down payment must come from the surplus, as well.
So, how long will it take to save up the down payment on O’Neill’s foreclosure prevention plan?
The median home value in 2003 was $140,000. Let’s pretend that today’s home values have only declined to that level.
Let’s say that this family really tightens its belt, they clench their teeth, live an unusually frugal lifestyle and on average, save half their monthly surplus.
$336 x .5 = $168/month.
The down payment on a $140,000 home would be $28000.
It would take this family 166 months, or just under 14 years to save up for their first home.
Forget the fact that the median household income cannot support mortgage payments on a median-priced home. And yes, they may be able to receive gifts from friends and family. Hey- you can even deplete your retirement savings to raise the down payment!
Nevertheless… is it safe to say that home prices would have to plummet in order to make this plan feasible?
When you look at the average American financials (most heads of household never look at their numbers), is it any wonder that so many homeowners are struggling to prevent foreclosure?
Should we be surprised that so many homes were financed with little-to-no down payment?
I agree, as do many people in this industry, that we have to get back to the point where down payments are required. And whether or not, as Mr. O’Neill says, the presidential candidates are telling the truth, it’s not terribly realistic to raise the bar this high, this fast.
The typical household is saddled with a sizable student loan because educational opportunities have been “expanded.” Forget that this increased availability has been afforded at an increased price due to debt financing. Many Americans are spending 16% or more of their take-home pay just to own and insure a car (this doesn’t include fueling and maintaining it).
The average American has been trained to consume, and conditioned to expect to be able to purchase a home with “zero down.” And it’s considered acceptable to take on a housing payment that consumes 35-40% of GROSS income. In fact, our current economy requires this behavior of most Americans.
So, when our politicians insist that we must do everything possible to “prevent foreclosure” and “preserve the system,” you have to ask yourself, “Is this ’system’ worth preserving?”
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