You’re mortgage is underwater. What do you do?

A few years ago, this would have been a fringe question for a fringe audience. Nowadays, though, 25% of all residential mortgages are underwater. In states like Nevada and Florida – two of the epicenters of the housing bubble and subsequent bust – more than half of borrowers owe more on their mortgages than their homes are worth. In other words, for a growing portion of homeowners, this question is of foremost importance.

For argument’s sake, let’s assume that you have already discussed a loan modification with your lender, and you have been either rejected or presented with an inadequate offer. As a result, you have made the decision to part with your home. [Admittedly, this is a weighty decision]. Should you sell your home at a loss, or simply walk away from your mortgage and allow your lender to deal with the fallout?

The first option is known as a “short-sale,” since the proceeds from the sale of your home wouldn’t be enough to cover the balance of your underwater mortgage. Accordingly, a short sale (or its first cousin, the deed in lieu of foreclosure) first requires the approval of the lender, because it is tantamount to writing off part of the mortgage as a loss. Still, many lenders are amenable to this possibility, because it is often less complicated – and hence, less expensive – than outright foreclosure. You will also need to confer with any junior-lien lenders as well as the mortgage insurance company, if applicable. After receiving an offer on your home, this must then be submitted to the lender (via its loss mitigation department) for final approval.

Here are a few additional things to keep in mind: Minimizing the transaction costs of the sale (by hiring an expensive real estate agent, for example) will go a long way towards convincing the lender that the deal is worthwhile. Next, while a short-sale is less painful than a foreclosure, there will still be some inevitable damage to your credit. In addition, you might be expected to pay taxes on the portion of your mortgage that was forgiven by the bank. Finally, be advised that short sales typically take longer to complete than normal sales, as lenders will often spend a long time deliberating over whether to approve the deal.

If your house has depreciated too much in value, and/or your lender is not willing to approve a short-sale, then a strategic default might be your last option. So-called as to distinguish it from a “conventional” foreclosure, a strategic default is a voluntary decision to stop making mortgage payments despite the capacity to do so. While choosing foreclosure might strike some as oxymoronic, it turns out that for many, it is actually a perfectly rational choice. Simply, the negative impact on one’s credit score and the possibility of a deficiency judgment, pales for some when weighed against the prospect of spending the rest of one’s lifetime paying off a mortgage that is well underwater.

That’s because while foreclosure technically remains on one’s credit report for 7-10 years, it can become functionally irrelevant in the eyes of lenders in half that time. In addition, deficiency judgments (in which the lender sues to collect the difference between the value of the property at the time of foreclosure and the amount owed under the mortgage) are illegal in many states, and rare in the rest. That being the case, the only remaining consideration is the moral one- deliberately breaking a contract that you have the ability to honor. While there are strong arguments to be made for both sides, I don’t think this is an appropriate forum to explore that dimension, however. Let your conscience be your guide.

With an estimated 80% of those aged 55-64 carrying some time of debt, the question of whether to pay off a mortgage or take it into retirement looms large these days. I will attempt to shed some light on it below.

Prior to the credit crisis and the bursting of the stock market bubble, financial planners recommended mortgage borrowers to plow all extra cash into stocks and other assets, rather than paying down mortgage debt. The argument was grounded in “simple” arithmetic; assuming a mortgage rate of 5.5% and the 15%+ annualized returns that the stock market was averaging, mortgage borrowers could earn a healthy spread.

This logic was turned on its head as a result of the market crash, as the S&P initially lost 50% of its value. In hindsight, borrowers reckoned that they would have been smart to sell off some of their more liquid investments and use the proceeds to pay down their mortgage debt. Now that the market has rebounded – though not (yet) to the highs of 2008 – some are wondering whether the initial advice was right after all. Maybe the key is merely patience.

Personally, I side with the camp that encourages a debt-free retirement. Using your mortgage loan to fund stock and bond market speculation is hardly sensible, regardless of the potential upside. Some analysts counter that a diversified portfolio will outperform residential real estate over the long-term, so you are better off maximizing the leverage on your home and plowing the proceeds into other investments. Research has showed, however, that this is simply not the case, especially after taking taxes into account.

To be fair, such a strategy could be defensible for younger generations, who are understandably more keen to take bigger risks in search of bigger returns. For those in or near retirement, however, now is not the time to roll the dice. If your retirement savings are sufficient or are on pace to become sufficient, then why would you jeopardize that by keeping money in risky assets? If, on the other hand, your savings are inadequate, you would be advised to use what you have to pay down your mortgage, so that your debt burden is lower.

If your mortgage is so large that repaying it is simply unrealistic or impossible, perhaps you may want to consider downsizing into a less expensive house, with the goal of lowering your mortgage debt. “Converting” your mortgage debt into a reverse mortgage is also a possibility, though one that you should only consider as a last resort, due to its high up-front costs and the steady erosion of your home equity that it will wreck.

I realize that my analysis risks being labeled by critics as simplistic. Many have argued, and will continue to argue that the decision to repay your mortgage debt is a complex one, and must be weighed against many factors, such as the interest rate that you are currently paying, the return that you expect to achieve on your retirement account, and the proportion of your net worth that your mortgage represents. As implicit in my advice, however, I don’t think any of this analysis is necessary. No one knows how the stock market will perform over the next next 30 years, nor does anyone know how much (if at all) your home would appreciate. The question is: are you willing to bet your retirement on it?

Given that mortgage rates are at record lows, many borrowers are urgently wonder whether they should execute a mortgage rate-lock. With this post, I will try to provide some clarity on this question.

Let’s begin with the basics. As implied by its name, a rate-lock is an agreement between borrower and lender that literally locks in a mortgage rate at a certain (most likely the current) level. Such an agreement will generally specify an interest rate, discount/origination points, and an expiration date. [As an aside, locking in an interest rate is not the same as being approved for a loan. According to the Federal Reserve, "A lock-in is not the same as a loan commitment, although some loan commitments may contain a lock-in. A loan commitment is the lender’s promise to make you a loan in a specific amount at some future time."]

Historically, lenders required legally binding commitments from borrowers before they would issue a rate lock. Nowadays, this practice is less common, since lenders have come to perceive that it puts them at a competitive disadvantage. As a result, lenders compensate for the possibility that a) interest rates will rise and/or b) the borrower will renege on the rate lock, by charging a small premium to execute the rate-lock. Most rate locks expire within 30-60 days; while longer time periods can be negotiated, you can generally expect to pay a higher premium for a rate lock that expires later.

There are a few things to keep in mind with a rate-lock. First, the agreement should always be in writing, since oral agreements would be possible to prove, if need be. Second, you should always make sue to lock the points as well as the interest rate; failure to do so would enable the lender to compensate for a rise in interest rates by charging more points, without violating the rate-lock agreement. In addition, try to approximate (with the help of the lender) when your loan can realistically be closed so that you select an appropriate time period of validity. On your end, make sure you do everything necessary to close the loan before the rate-lock expires. Finally, make sure you read the fine print. Some rate-lock agreements contain clauses that render the whole contract void under certain circumstances, while other lenders slip in language which allows them to charge a higher rate than initially agreed-upon, as long as it doesn’t exceed a certain cap.

By this point, you’re probably wondering: What’s the point of a rate-lock, anyway? While certainly you can successfully go through the process of obtaining a loan without bothering to lock in the rate ahead of time, it certain makes the process much smoother. Knowing the interest rate ahead of time allows you to calculate your exact monthly mortgage payment, and confirm that it falls within your budget. It also makes a very stressful process (obtaining a mortgage) that much less stressful, since you don’t have to worry about whether rates will change prior to closing.

As to whether a rate-lock is right for you, that’s a question that only you can answer. No one can predict interest rates, which means it’s equally impossible to predict whether an interest rate-lock will ultimately prove to be a wise decision. Consider, however, that interest rates are currently at record lows. While they could certainly drift even lower, the conservative assumption is that they can only go up from here. If even a slight uptick in mortgage rates would jeopardize your ability to close on the loan, a rate-lock would be a safe choice. If, on the other hand, you have a cushion built in, not locking won’t do any harm, but could leave you feeling stresses until your loan closes. For those of you who are somewhere in between, consider a rate-lock agreement with a “float-down” option, which protects you against rising rates while also giving you some of the upside from lower rates. While you will have to pay a premium for this additional feature, at least you won’t be kicking yourself if you signed an agreement and rates plummet.

US News & World Report just released its guide to the status quo of mortgages (Getting a Mortgage in 2010: 10 Things to Know). While the guide is fairly broad, it falls short on depth; I would like to summarize, simplify, and elaborate upon it below:

1. Tighter Lending Standards: Given the deteriorating credit positions of lenders, it’s no surprise that lending standards have tightened dramatically, to the point that it might now be impossible for certain parties to receive loans. Documentation has also become more strict. The days of “Liar Loans” are behind is. Instead, expect to provide verifiable proof of both income and assets, and expect that both will have to meet very rigid ratios, with very little leeway.

In addition, credit history should be impeccable (in the 730’s or above) in order to obtain a mortgage with the most favorable terms. As usual, borrowers should check their credit report in advance to make sure there aren’t any errors (you are entitled to view it free once per annum), and to scrub them accordingly. According to US News, 2010 could witness “additional belt tightening” as banks move to implement “sustainable” lending practices.

2. Lower Interest Rates: Behold one of the paradoxes of the housing market crash. While lending standards are tighter (to mitigate the perceived higher risk), lending rates are also lower (facilitating more risk taking). In other words, while lower interest rates would normally compel more borrowers to enter the market, many are simultaneously deterred because of tighter credit requirements. As a result, lending rates have continued to trend lower, following a brief uptick over the summer. They now stand at record lows.

Going forward, it seems rates must go up. The Fed’s asset purchase (known as quantitative easing) program is already winding down, and formal rate hikes probably aren’t far off. In addition, with investors nervous about the growing US national debt, they might curtail their purchases of Treasury securities, which would send Treasury yields up, and bring mortgage rates with them.

3.. Down Payments: Only a couple years ago, borrowers could purchase a house with zero money down. Not anymore. Nowadays, you should expect to put down at least 20%, which was standard before the housing bubble. FHA and other government-sponsored mortgage programs often carry less rigorous down-payment requirements, but carry higher interest rates to compensate for the additional risk. Either way, you will probably be required to obtain private mortgage insurance (PMI) if you want to put down less than 20%.

4. Government Loans and Incentives: Speaking of the FHA, it’s unclear how long its loans will be so readily available, due to its growing financial problems. It has already lowered the maximum loan amounts for reverse mortgages, and may do the same for conventional mortgages.

The other government program that you should be aware of is the tax credit for first time home-buyers. The credit has been extended until May, and most of the requirements have been loosened, to the extent that virtually all homebuyers can find some way to qualify.

According to the most recent data, more than 25% of mortgages are underwater- that is, the balance owed on the mortgage exceeds the value of the home. In the most troubled areas – such as Florida, Nevada, California, and Arizona – this figure can exceed 75%. In addition, negative equity positions can be sizable; one survey showed that the average Miami resident with an underwater mortgage owes about $75,000 more than the value of his mortgage.

In light of these statistics, it’s not surprising that more and more borrowers are simply walking away from their mortgages, despite the fact that many have the financial wherewithal to continue making payments. According to Experian, a credit rating agency, 582,000 such borrowers executed a “strategic foreclosure” in 2008 alone, which is more than twice as high as the 2007 total.

In other words, a growing contingent of borrowers has determined that it’s simply not economical to continue paying their mortgages. (As an aside, this is an excellent indication that homeowners, themselves, don’t have much confidence in the apparent housing recovery that many analysts believe is taking shape). Before, it was assumed that the impact of foreclosure on one’s credit would be enough to discourage strategic default, but the uptick in this trend demonstrates otherwise. Some borrowers evidently think it will be too many years before housing prices will return to the bubble levels. For those that bought properties for speculative purposes, there is a sense that it makes little sense to continue making payments on an investment that has little value.

Despite the clearly negative impact of this phenomenon for lenders, they appear to be doing little to avert it. Some are finally helping borrowers with loan modifications, but this rarely involves a truncation of the principal amount. Thus, borrowers who were underwater before receiving a modification will likely remain underwater after a modification, despite the lower monthly payment.

The government, for its part, hasn’t done much either. Its program aimed at helping underwater borrowers reduce their debt burdens through refinancing has been a miserable failure, reaching only 3% of eligible borrowers, despite the recent elimination of an initial 5% cap on underwater equity. It seems that despite the possibility of a lower interest rates, most borrowers are smart enough to realize that paying money (i.e. closing costs associated with the refinancing) to retain an underwater mortgage doesn’t make financial sense. Ironically, the Mortgage Forgiveness Debt Relief Act of 2007 is facilitating strategic default by allowing borrowers to discharge of debt tax-free. [If not for the law's passage, foreclosure could have potential tax consequences].

Still, there are negative consequences of ignoring government help and deliberately defaulting on a mortgage. For the majority of Americans, foreclosure is still stigmatized. From a financial standpoint, foreclosure (as well as short sales and deeds in lieu of foreclosure) will immediately result in a lower credit rating, diminished ability to borrow, and higher interest rates. Thanks to the Mortgage Forgiveness Debt Relief Act, strategic default no longer carries any tax implications. Of course, they may be costs associated with finding a new residence.

From a legal perspective, one’s liability post-foreclosure depends one’s state of residence. 10 states forbid banks from making claims against personal assets when foreclosing on a mortgage with negative equity. The other states, however, generally allow lenders to sue for the difference. Legal experts have indicated, however, that this is only used in 15% of cases, which means the majority of defaulters get off with hardly a slap on the wrist. Still, if you’re considering this as an option, it would be beneficial to consult a lawyer and/or accountant just to confirm.

Determining the size of one’s down-payment is more complicated than it would seem. Historically, the prevailing wisdom regarding down-payments was the larger the better. During the inflating of the housing bubble, however, this logic was turned on its head, and it was even possible to take out a no-money down mortgage. As it turns out, there are advantages and disadvantages to both approaches.

Personal finance columnists usually advise a down-payment of 20% Loan-to-Value (LTV). In other words, take the size of your mortgage, multiple it by 20%, and VOILA, you have your down-payment. According to their reasoning, 20% is substantial enough both to demonstrate your creditworthiness to the lender and to cushion you from negative price swings in the value of your home.

Given the decline in housing prices, however, it’s perfectly conceivable that borrowers that made 20% down-payments are still underwater in their mortgages. After a foreclosure, then, such borrowers will be left with stains on their respective credit report, and gaping holes in their personal assets. From the lender’s perspective, meanwhile, such borrowers are actually considered less credit-worthy than those that make the minimum required down-payment. For those of you scratching your heads: It turns out that those who make down-payments between 20-25% are actually more likely to default. In addition, such borrowers aren’t required to purchase private mortgage insurance, further increasing the cost of default to the lender.

The cost of private insurance, then, can actually be recouped in the form of lower interest rates! In other words, there isn’t much of a financial penalty (sometimes even a reward!) for making a smaller down-payment. Some financial planners now encourage making the smallest allowable down-payment, based on the reasoning that borrowers can then set aside extra money in an emergency fund, making it less likely that they will become delinquent (miss payments) on their mortgage further down the road.

What is the minimum down-payment? Well, that depends on the loan, and the lender. A Federal Housing Administration (FHA) loan requires a 3.5% down-payment. [However, proposed legislation would increase this to 5%]. For veterans, or those that live in rural areas, there are VA home loans and Guaranteed Rural Development loans, respectively.

For those not eligible for the loans above, it might be worth looking into a down-payment assistance program. Some of these programs are also government sponsored, and/or provide low-interest loans to be used exclusively for making a down-payment. There are also several not-for-profit companies which offer down-payment assistance, typically by rolling the down-payment into the overall loan amount, but such organizations have come under scrutiny in the wake of the collapse of the housing market. For first time home-buyers, the $8,000 tax credit can now be “monetized” and applied towards the down-payment. [Under earlier rules, the credit was received in the form of a tax credit, and hence, could not used for a down-payment.]

For those still struggling to scrape together the cash, there are a few more options available to you. First, you can talk to your lender and try to pledge securities in lieu of making a down-payment, but be advised that such is tantamount to borrowing money to buy stock. Second, if you already own the land that your home is (being) built on, that may qualify as a down-payment. Third, you can appeal to family/friends for help, but be aware that the lender will demand proof that any such assistance is a gift, rather than a loan. Finally, you might try talking to the seller, and asking him to help you make your down payment (offset in the form of a higher sale price). This will only be possible, however, if the sale price initially exceeded the appraised value.

All else being equal, a larger down-payment should translate into smaller monthly payments, as a result of both lower principal and interest. It should also lower your mortgage insurance premiums. As I noted above, however, some lenders actually penalize those who make larger down-payments. Ultimately, every situation is different, and it probably makes sense to use a mortgage calculator to crunch the numbers associated with a few different scenarios to see ultimately which one makes the most (financial) sense for you.

One year after the government officially took control over Fannie Mae and Freddie Mac, that is the question everyone is asking. The companies have racked up a combined $165 Billion in losses over the last couple years, and already burned through $100 Billion in taxpayer-financed aid. Altogether, the government now has $400 Billion exposure to Fannie and Freddie.

It’s quite clear that something has to be done. A new report by the Mortgage Bankers Association (MBA) recommends that the two companies be split into three smaller entities and continue to perform the same role that they do now. Under the proposal, the new firms would bear all of the direct risk from owning/underwriting mortgages, but would still enjoy some form of government guarantee. It’s not clear how this structure would facilitate stability, though it would probably increase transparency.

An unrelated report by the Government Accountability Office (GAO) examines the three options for Fannie and Freddie without actually offering an opinion as to which one is most advantageous. It is quite critical of the MBA proposal, arguing that “Creating ‘reconstituted’ for-profit government-sponsored enterprises, either publicly traded or owned by lenders, ‘could lead to even greater moral hazard. ‘ ” The alternatives – elimination, privatization, or full government takeover – however, are equally fraught with complications. Without Fannie and Freddie, it’s unclear how the mortgage markets would function, while a government takeover would probably result in a downsizing of their lending portfolios.

Before I continue, I want to stop and explain the role that Fannie and Freddie play in mortgage lending. Namely, the two firms act as liquidity providers, by using shareholders’ equity to purchase huge portfolios of securities mortgages (Mortgage-Backed Securities). And when I say huge, I mean it: “The companies, which own or guarantee about $5.4 trillion in U.S. residential debt and have accounted for about 70 percent of all new home loans this year.” By acting as the largest buyers, they enable mortgage lenders at the ground level to originate new loans, confident that they can be quickly repackaged and sold.

At this point, it seems the most likely scenario is that which was proposed by the MBA. It’s hard to understand how this represents a solution, but I guess it’s like the old joke about democracy: “It’s the worst system, except for all the others.” In other words, Fannie and Freddie have become the fulcrums of the mortgage lending industry, so their disappearance would be accompanied by a massive decline in new mortgage origination.

There are certainly analysts and policymakers that would argue this is a desirable outcome. The government has no business – explicitly or implicitly – playing with mortgages. If the government formally exited the mortgage lending industry (except to serve as regulator), it would probably lead to better risk management, since investors would have to assume the full risk of owning mortgage backed securities.

In addition, some of the slack caused by their disappearance would probably be picked up by private investors, since a portion of the capital currently invested in Fannie/Freddie would presumably be diverted to firms with similar interests. At the very least, it seems lending standards would tighten and interest rates would rise, but both of these phenomena have already started to obtain.

From the standpoint of current mortgagers, this won’t affect you much. Refinancing could prove more complicated, but it wouldn’t affect the terms of your current loan. For potential borrowers, it would most likely make it both more difficult and more expensive to obtain a mortgage. It’s tempting for me to urge you to preemptively go take out a mortgage lest the system changed tomorrow, but this is extremely unlikely, as the GAO estimates ” ‘potentially lengthy transition’ given their size.”

In other words, don’t let this affect your decision one way or another.

Anyone who has done any research into taking out a mortgage has surely heard of points, but based on the feedback of our readers, few seem to actually understand how the points system works. In a nutshell, points refers to paying an upfront cash payment in exchange for a lower interest payment (and lower monthly payment, by extension). It is also possible to receive a rebate (negative points) in return for paying a higher interest rate.

Many lenders take advantage of (borrower misunderstanding of) points in order to make it look like their interest rates are lower than their competitors, when in fact the difference can be explained entirely by the points. On the surface, paying points would seem like a great option, since mortgage affordability is generally calculated backwards, using monthly payment – rather than the size of the mortgage – as a starting point.

In this way, the numbers can be manipulated, such as to make it so a potential borrower can afford a larger mortgage simply by extracting an upfront payment in exchange for a lower monthly payment. Of course, this can also be achieved by simply increasing the size of one’s down-payment, but yields slightly different savings. Generally speaking, a higher down-payment is more economical in the short term, while using points to buy down the rate is only beneficial over the long-term.

So, how can you go about calculating whether it makes sense to pay points? This Points Calculator makes this question easy. Simply plug in the loan amount, points, interest rate, interest rate with points, loan term, and a realistic return on investment, and the calculator will quickly generate a break-even point- the amount of time it will take before you can achieve positive savings on your mortgage.

In other words, the points system inherently favors the bank over the short-term. It’s impossible to achieve savings from Day 1. Instead, you must plan on living in your home (and keeping your current mortgage) for a certain number of years before paying points becomes worthwhile. If you have every reason to believe that you will stay in your home longer than the break-even period, then it makes sense to pay points. Instead, if you plan on refinancing or “trading up” before the break-even period, it probably makes more sense to simply increase the size of your down-payment.

Another consideration is whether to roll the points into your mortgage, in order to avoid making a large up-front payment. This will significantly extend the break-even period and is only economical if your savings rate (i.e. expected return on investment) is higher than your mortgage rates, and your marginal tax rate is low. The latter is a factor because financing your points allow the tax benefit to be amortized over the life of the mortgage, while an upfront payment can only be deducted in the year in which it is paid.

Finally, it’s possible to temporarily buy-down your mortgage payment, such that you pay a lower rate for only a few years. The 2/1 buy-down and 3/2/1 buy-down are the most common and straightforward, with the latter reducing your interest rate by 3% in the first year, 2% in the second, and only 1% in the third year, before reverting to the stated rate. Typically, you shouldn’t expect to achieve savings from a temporary buy-down; rather the perceived benefit is that you can delay the normal payment for a couple years, giving your income a chance to catch-up.

When filing a mortgage application, you will be required by your lender(s) to submit certain documentation, in order to prove both your income and your assets. While your lender will most likely inform you of specific requirements, you can save yourself precious time by preparing all of the documents in advance.

In terms of proof of assets, you should begin by compiling information on all of your bank accounts, including account numbers, the branch address(es), and copies of recent statements. Remember to include information for both checking and savings accounts. You should also plan on furnishing statements of other liquid assets, such as IRA retirement accounts, CD’s, annuities, and estimated cash value of life insurance policies. It wouldn’t hurt to provide valuations for Illiquid assets (real estate, valuables).

The next step is to document your income. This is best achieved through the provision of pay stubs, W-2 withholding forms, and even recent tax returns. If you are self-employed, you should prepare audited income statements for your business. Generally, lenders won’t require more than two years worth of data, but in some cases, they may request additional information.

Even if your creditworthiness has been established (and especially if it isn’t), it wouldn’t hurt to show timely payment of rent and utilities for the last 1-2 years. Your lender will also need to see and legal documents/filings (related to divorce, etc.) in order to determine if any potential liabilities exist.

Prior to the bursting of the housing bubble, it was possible to obtain a competitively-priced loan without providing any or all of the documentation listed above. Reacting to lending standards that were perhaps overly stringent, lenders gradually loosened their requirements. This led to lender complacency and the consequent proliferation of so-called liar-loans, which describe mortgages that require little or no documentation.

In some cases, it is still possible to obtain such loans. Some lenders will accept stated income and/or assets (as opposed to verified income and assets), but you can expect the spread to full documentation loans to be higher than before. According to a recent report, “Less-documented borrowers who reported high incomes were far likelier to default than those whose high incomes were verified – suggestion that loans were made on misleading information.” The report found that applicants were likely to overstate income by 20% on average when verification wasn’t required.

For some applicants, namely those who are self-employed or in-between jobs, a low-documentation loan might still be the best choice. No-ratio loans, whereby income and assets are verified but not used to calculate typical do-not-exceed ratios, might be necessary for those who want to purchase houses that are technically unaffordable.

Of course, you should speak to a loan officer before deciding whether a low-documentation loan is appropriate for you, but it helps to know your options before going in.

You can find thousands of websites and associated calculators that purport to tell you definitively whether it makes more (financial) sense to rent or to buy. The Mortgage Calculator Blog also took a stab last month at answering this perennially difficult question and concluded: “This is not to say that it’s better to rent than to buy. Instead, think of it as an exhortation to really think critically before deciding whether to jump into home ownership, since it may ultimately prove more expensive and more stressful than renting.”

It turns out that advice is now being echoed by more and more people, who are insisting that universal home ownership was never economically viable, and not entirely desirable. In a recent Wall Street Journal Op-ed, one historian notes that renting used to be the norm, and buying/owning was the exception: “From 1900…through 1940, fewer than half of all Americans owned their own homes…But from that point on forward (with the exception of the 1980s, when interest rates were staggeringly high), the percentage of Americans living in owner-occupied homes marched steadily upward. Today more than two-thirds of Americans own their own homes.” He points out further that what ultimately catalyzed the change was not a change in culture/values, but rather a shift in government policy: “It wasn’t until government stepped into the housing market, during that extraordinary moment of the Great Depression, that tenancy began its long downward spiral.”

Over the past 50 years and accelerating over the last decade, this policy assumed a grotesque form. An increase in federal housing programs/subsidies/guarantees combined with easy credit to make home ownership easier to achieve, and hence more prevalent. The results speak for themselves: “The collapse of the for-sale housing market has left many low-income people holding mortgages they can no longer afford, becoming victims of skyrocketing foreclosure rates.” Meanwhile, homeowners began to see their homes as vehicles for investment, rather than for their inherent utility. The diagnosis is clear, according to the WSJ: “It’s time to accept that home ownership is not a realistic goal for many people and to curtail the enormous government programs fueling this ambition.”

As if on cue, the Obama administration is springing into action. It recently announced the allocation of more than $4 Billion in stimulus funds to the Department of Housing and Urban Development, with the goal of mitigating the growing shortage of affordable rental housing. “The idea is to pay for the construction of low-rise rental apartment buildings and town houses, as well as the purchase of foreclosed homes that can be refurbished and rented to low- and moderate-income families at affordable rates.” Politicians are also jumping on board, some claiming cynically that they always opposed the Bush plan to expand home ownership. “I’ve always said the American dream should be a home – not homeownership,” said Representative Barney Frank, for example.

In any event, this could be the start of a huge shift in preferences. Ironically, lenders are facilitating this shift by tightening lending standards and making it more difficult for potential borrowers to secure mortgages. Personal finance columnists also appear to be on-board, advising their readers to invest their savings in traditional vehicles, rather than in the dream of home-ownership. Could this be the start of a return to the days when “holding a mortgage came with a stigma?”