Tuesday, April 21, 2009

Where's A Legislator When You Need One?

With all the foreclosures going on in this country, can they all be from sub-prime or predatory lending? Contrary to popular opinion, they are not. There are many people who can afford to pay for their homes, but yet still walk away. Why would anyone do that? Many of the millions of Americans who bought homes during the real estate “boom” now have homes that are valued much less than what their mortgages are. Guess what? Walking away -- even if you can afford the mortgage -- is perfectly legal!

Case in point: A Detroit City Councilman, Kwame Kenyatta, left his home for that very reason and admitted it. This man, a government official, plans to run for mayor of Detroit. His home was purchased for $225,000 and it is now worth $100,000. His monthly payment is $2,600 a month and supposedly was scheduled to go up by another $1,000 “soon.” Councilman Kenyatta wasn't even behind on his payments at all when he decided to just walk away.

Through the Michigan property tax estimator, I estimated his taxes at an astonishing $9,000 dollars per year. Most of us will admit that is a ridiculous amount of taxes to pay on a home worth $225,000, much less on a home worth $100,000. Still, these outrageous property taxes were known at the time of purchase. In Michigan, the taxable value can never go down while you own the property, no matter what happens to property values. That is something the Michigan legislature might want to rethink in light of these types of foreclosures.

Basically, a house payment with principal and interest of the full $225,000 at 7% is only $1,500. With approximately $700 added on for property taxes, that leaves over $400 a month for homeowners insurance and PMI. Private mortgage insurance (PMI) is an insurance policy which protects the lender in case of default by a buyer who puts down less than 20%, which it appears is the case here (making it easier to walk away).

That sounds like the lender in all these deals of less than 20% down are protected, in which case, the PMI companies would be the ones in trouble. However, in many cases, the same lender loaned the balance, at closing, from the down payment to make up the 20% in a second mortgage on the home. This eliminated the need for PMI insurance. In these cases, the lender was left unprotected. Even if another lender was involved, the main, or first, mortgage company has to approve the deal before it can close. It is a distinct possibility that Kenyatta then had a first and second mortgage on his home instead of PMI. Which one is worse? Deliberately burning a private mortgage insurance company or a bank?

Since his current payment of $2,600 a month covers a full purchase price mortgage, where can the additional $1,000 a month future payment be coming from? Since that is one of his excuses for walking away, that is a question that should be asked of-- and answered by -- Councilman Kenyatta.

Don't let the large mortgage payment fool anyone into sympathizing with the councilman. His reported $81,000 salary is 288% higher than the current median household income in Detroit of $28,097, according to the U.S. Census Bureau. After he pays his mortgage, he has another $4,150 in his pocket. That doesn't even include any possible income from his wife.

While it is a terrible hit to Kenyatta and millions of people all around this country, it is a chance you take when you make an investment in real property. When you buy a car for $20,000 and drive it off the lot, it might only be worth $12,000. Are you then allowed to just walk away from it just because it isn't worth what you paid for it? Of course not!

Why does this matter to us? Voluntary foreclosure contributes to neighborhood blight, drives property values down even further due to more inventory, affects local and state governments in the form of lost property tax revenue and adds additional strain on our nation's banks. If real estate had continued to boom, these same people would have taken advantage of the new equity that results from booming prices.

I can understand Americans who, for various reasons like unemployment or other changes in finances, can’t pay their mortgages and have to walk away. However, the many people who can afford these payments, yet choose to walk away are undermining our country, not only financially, but also morally. In other words, they are committing legal bank robbery.

Why haven’t our legislators stepped up to the plate on this issue? Is it because some of them are doing the same thing? Surely it has come to their attention by now. The IRS addresses losses on investments, but there is no current law on primary home loss of value. If we had a law in place giving incentives to stay, it might help eliminate some of this legal bank robbery that we are seeing.

Why isn't there a law preventing people who can afford their mortgages from walking away from them? At the very least, there should be some repercussions, other than the same mark on their credit history as the unfortunate unemployed or victims of predatory lenders. Where is a legislator when you need one?

What is the incentive, other than moral character, for homeowners to stay put when they can go down the street and buy a similar house for thousands (and thousands) less than they currently owe? Many lenders are ultimately going to have to take the current foreclosures -- and poor credit history due to it -- into account when offering new loans. Otherwise, millions of people are not ever going to be able to purchase a home again. We are going to be a nation of renters where the super wealthy owns all the property. That is not what America stands for, folks. Let us insist that our legislators do something about it -- and pronto.

Mr. Kenyatta has shown his true colors before entering the mayor’s office, unlike many candidates. Let us not reward a man of low character with an even higher office than he currently holds. The good people of Detroit should be shouting for impeachment of his councilman position. Let us hope that the voters of Detroit show their moral outrage and keep this bank robber out of the mayor's office.


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