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Foreclosures, Sub-Prime Loans, And The Real Reason The US Housing Market Is In Free-Fall

Updated on April 3, 2009

It's happening. We're seeing the reports everywhere.

Official figures put the average house value in the US at the end of 2007 down 9% compared with the previous year.

There is a fundamental misunderstanding taking place here, and it seems to grip even the financial commentators.

For years now, the figure reported as the "value" of a house in the US has not been what we generally understand by that word - it has been something very different.

It used to be that the "value" of an item was the price at which it could be exchanged in a transparent market, between a motivated (but not desperate) seller and a motivated (but not desperate) buyer.

It used to be that when a house was "valued", the resulting figure was an expert's estimate of that actual market price.

But at some point in the past four or five decades, the entire juggernaut ran off those rails.

What is my evidence?


I kid you not.

Go and look at the real estate section of eBay.

You will find listings of homes, including their "valuations", and you will find the actual prices for which they changed hands at auction.

Now, you would have to think that an auction with a global reach would provide a reasonable indication of the price agreed between a motivated seller and a motivated buyer, wouldn't you?

I know there are issues with this direct comparison - the sale doesn't take place immediately, eBay Real Estate merely establishes an agreement that the sale WILL take place, for example, and there are requirements in terms of depositing funds to demonstrate good faith.

However, the fact that there are homes changing hands at these prices is still a fact.

So, go and check it out.

House "valued" at $97,000 sells for $38,000.

House "valued" at $38,000 sells for $9,000.

So, if the seller is willing to accept this price, and the buyer is there paying it, what on Earth does it mean to say that the house is "valued" at two or three times the selling price?

And here we come to the really nasty part of the equation.

These days, "value" doesn't reflect how much the house might make if it were sold.

"Value" refects how much you can borrow against the house.

Lenders aren't really concerned about anything other than whether they can get their money paid back.

When things were going well, house prices were rising, incomes were rising, people could handle the repayments, a new generation took the reins of management. This generation has lived their entire lives in the rising markets of the post-war boom. Their understanding of risk was distorted by a lifetime's experience of inflation (which reduces the value of debt over time) and permanently rising asset values.

Gradually, a bit at a time, the lending policies shifted.

"To help more people own their own homes ..."

And to help more people amass investment portfolios, of course.

Everyone was in on it - all the pigs were lined up at the trough. Low income earners who wanted to own a home they couldn't really afford, middle income earners who wanted a bigger home and the ability to pull out their equity to finance consumer purchases, high income earners looking for tax deductions and a property investment portfolio, politicians currying favor, and lenders looking for bigger profits by writing more loans at higher rates of interest.

If assets are rising, so the thinking goes, and inflation is working in their favor, then borrowers just need to hold on and make the payments for a while, and Nature will fix the problems.

Thus was born one of the most creative financing techniques yet - let's allow people to make SMALLER repayments for the first five years, and we will add the extra they should have been paying to the balance of their loan. After five years, the house will be worth more, so the bigger mortgage won't be a problem, and inflation will have raised their income, and they will be able to make the repayments at the higher rate.

And now we have reached the breaking point.

Five years have passed, and the expected growth in values and incomes hasn't heppened.

The borrowers can no longer make the repayments.

The creative financing techniques got just a little too creative.

And now, fifteen million Americans owe more than their houses are worth.

Structural Problems With The US Housing Market

I am in a unique position to comment on why the US housing market could so readily fall into this disastrous state.

As a financial educator, I have been teaching people about financial management and wealth creation in Australia.

Obviously, Australians have looked to overseas markets to expand their opportunities for wealth creation, as Australia is such a small country itself. Not is physical size, of course, being as large as the whole of continental USA, but in population.

Over ten years ago, I did a detailed study into the US housing market,because I was fascinated by the opportunities that existed there for buying houses well below their market value, due to foreclosures.

That simply doesn't happen in Australia, and watching how this is playing out, I have to say that the US government should seriously consider some major structural reforms to make the US market more like the Australian market.

1. Fiduciary Duty Of Mortgagee In Foreclosure

In the US, when a lender forecloses, they are only obligated to recover the unpaid balance of the mortgage.

So, for example, if there is a $100,000 house, with $50,000 owing on the mortgage, and the lender forecloses, they really don't care if they only get $50,000 for the house.

Bargain hunters haunt the foreclosure listings, looking to snap up these bargains.

So much so, that it actually makes a second market, where houses are trading for far less than their "official" valuation.

The existence of this "sub-value" market makes a mockery of the official "valuation" of houses, and creates the environment in which lenders can apparently disregard the actual prices at which homes are changing hands.

In Australia, lenders are legally obligated to obtain the market value for a property when they force its sale, and to give the resulting equity to the borrower, and they can be sued by the borrower if they sell it below market value.

2. Assuming Mortgages

In the US, you can sometimes just take over a mortgage from someone else when you "buy" their house.

To avoid foreclosure, many people take this path, which allows the "buyer" to basically walk into the house with no downpayment, and to gain a mortgage without ever having to satisfy the lender that they can afford the repayments.

3. Disregard For Equity

Because the equity in one's home (the difference between the value of the home and what is owed on it) can be destroyed with the stroke of a pen, US home owners simply do not think of it as real.

They don't struggle to save it, they don't think of their home as a place where they are putting savings, and they don't pay off their mortgages as quickly as possible, because if the house is ever sold in foreclosure, the only beneficiary of that strategy is the lender.

Australians are viciously, passionately protective of their equity. They know it is protected by the government, and for many people, particularly the self-employed, it is their only form of retirement savings. Paying off the family home "owning it free and clear", is the pinnacle of financial accomplishment for many Australians.

4. Tax Deductions For Home Mortgage Payments

I have to say, from the outside, this policy is sheer lunacy.

I realise that the political fallout makes it almost impossible to consider, but really - you are encouraging people to borrow every last penny of value they can against their home, and they can spend it on anything they like - consumer goods, holidays, parties, whatever. You are also encouraging people to buy bigger, more expensive homes.

In Australia, mortgage payments on the home you live in cannot be deducted. Owning your home is considered consumption, like buying food or paying rent.

However, if you borrow against your home to make an investment - shares, property, managed funds, etc, then you can deduct the interest payments, because that money is earning you an income.

It doesn't stop people borrowing their home equity and frittering it away, but it reduces the incentive.

5. Low-start Loans

We experimented with these in Australia about ten or fifteen years ago, and gues what? Lots of people ended up owing more than their house was worth.

They are just a bad idea, full stop, and they are no longer allowed here.

Taking these five factors, together with the expectation that prices would rise forever, the US housing market turned into a complete fictional universe.

The paper "valuations" for property in the US are now completely meaningless, and as long as mortgage and lien holders can foreclose without any responsibility to sell at anything like market value, there will always be a cancer eating away at the real value of houses.

A "valuation" on a house in the US is somewhere between hope and fiction, and it will remain so until the underlying structural problems in the US housing market are fixed by making significant changes to the financial laws and regulations.

I Am In The US Housing Market Now - What Do I Do?

For the house you live in - set your budget for housing at one third of your after-tax income, and adjust your house so that is all it costs you.

As an investor, you don't care about the "valuation" on your property if you never need to sell it. Your mantra should be "cashflow positive" - the rent pays the mortgage, repairs, and all other costs.

This information is for educational purposes only and does not constitute general or personal legal or financial advice - you should make your decisions after proper consultation with properly licensed legal and financial professionals.


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    • profile image

      Matt 7 years ago

      Who says low-start loans are no longer allowed in australia?? There are companies advertising them in every state.

    • Inspirepub profile image

      Inspirepub 8 years ago from Sydney, Australia

      Thanks, Amanda and propertyauction. I agree with you Amanda - it beggars the imagination that lenders can get away with being so thoroughly irresponsible and selling houses for pennies on the dollar, when the borrowers have scrimped and saved, sometimes for decades, to accumulate that equity. I don't understand why Americans aren't marching on Washington with placards, demanding instant reform.

    • propertyauction profile image

      propertyauction 9 years ago from UK

      Well-argued points you have here. It's also nice to see that you take time to address your readers' comments. I'm into real estate myself and hubs like yours are welcome in my book.

    • Amanda Severn profile image

      Amanda Severn 9 years ago from UK

      I work in estate agency (real estate) here in the UK, and I found this article both fascinating and informative. I now completely understand how the sub-prime crisis came about. You've filled in a few gaps for me, especially the fact that repossessors do not need to sell at market value. How mad is that?

    • bgamall profile image

      Gary Anderson 9 years ago from Las Vegas, Nevada

      That 8-10 times, even if it drops to 5-6 times is unsustainable. There is no point in paying that much when rents cannot justify the investment. I am amazed that Australian real estate has remained so high, but maybe that is changing.

      Add to this that the interest rates are artificially low, then when inflation hits, people will have to sell into the teeth of higher interest rates, housing will not be such a great investment. I see all this turmoil as lasting for quite awhile, and that housing will be in the deep freeze for a long time. My parents bought a house for 5000 in 1941 and had it paid for in 5 years. It makes no rational sense why housing has become so expensive with the potential to make one house poor. That is so nuts.

    • Inspirepub profile image

      Inspirepub 9 years ago from Sydney, Australia

      It has been a long time since house prices in Australian cities were 3 times the average wage - back in the 50s, maybe. The average house in any of the east coast cities is about 8-10 times the average wage.

    • bgamall profile image

      Gary Anderson 9 years ago from Las Vegas, Nevada

      As we can see, housing is way too expensive and a house should never cost more than 3 times household income for one year. But of course easy money no doc, adjustable, option arm, etc loans drove the prices up to bubble levels that cannot be sustained.

    • marg07 profile image

      marg07 9 years ago from Australia

      Interesting isn't it how the media has sooo much influence. When that was bandied about I actually thought it hard to believe.

      Maybe it was to frighten us into action. But I do feel America and Aussies are now slowly catching on to the dreadful state of their health and starting to realise they are being hoodwinked by big money making corporations. The last thing most of them are concerned with is our health.

      We need to all go back to basics.

    • Inspirepub profile image

      Inspirepub 9 years ago from Sydney, Australia

      That "fatter than the Americans" study was a wonky statistic, somehow. This week I see that 2/3 of all Americans are overweight, and i doubt Australia has reached that level yet.

      But yes, teach nutrition, financial skills, and communication, and the world is our oyster ...

    • marg07 profile image

      marg07 9 years ago from Australia

      Yea yea, nutrition is my passion. I have written a hub page on just that. Us aussies now are apparently fatter than Americans. So with diabetes, mental health problems and an aging society can you imagine the burden on our health system in the coming years. We must get healthy!!

      Combine financial intelligence and health and we will be a force to be reckoned with!

    • Inspirepub profile image

      Inspirepub 9 years ago from Sydney, Australia

      I couldnät agree more, marg07 - if you give people the choice about whether or not to make the effort to learn this vital life skill, unfortunately many people will choose to avoid it! Catch them young, and teach financial knowledge alongside nutrition and hygeine.

    • marg07 profile image

      marg07 9 years ago from Australia

      I hear what you are saying and commend your effort to educate but all people are not on the same playing field.

      Things have, in the way of loans have been made to look so easy and for those less educated they don't understand the consequences.

      This is why I say it should be compulsory in schools. Many probably don't want to learn maths either when in school but are made to. Same should be happening with financial education.

    • Inspirepub profile image

      Inspirepub 9 years ago from Sydney, Australia

      Well, marg,07, as someone who has been striving to educate people financially for many years now, I can tell you that many people either don't want the education, or consider it insufficiently important to make time for it right now.

      You can't blame people who have knowledge for using the knowledge - should they pretend not to notice opportunities, just because there are those around who don't see them?

      Especially in Australia - and the US for that matter - where these days you can get a good basic financial education completely for free, just by going to all the free financial seminars on offer.

      Nobody living in a Western democracy these days can claim that they were forced to remain financially ignorant.

    • marg07 profile image

      marg07 9 years ago from Australia

      How lucky we are here in Aussie. Still we will feel pain.

      What is missing in our school systems is financial education. Forget poetry replace it with compulsory finance! In my opinion those with the financial knowledge just take advantage of those without. It is a crime, no doubt about it. And who will get off scott free?? The US is bailing out the very ones who got people into the mess in the first place.

      We can't have people educated though can we -then there would be no one to take advantage of!!!!!!!!!!!!!

    • Inspirepub profile image

      Inspirepub 10 years ago from Sydney, Australia

      Yes, I have always been fascinated at the way you can pick up houses well below value at foreclosure sales and so on, and the current market is full of people just looking to get out of mortgages, so if you are cashed up it's a great time to buy. It is only recently, though that I started to wonder how much the secondary market of below-value sales was really making the supposed "values" works of fiction. I guess we are finding out now.

      I'm sure the wheel will turn again, but there will be lots of weeping and wailing and gnashing of teeth in the meanwhile, unfortunately.

    • pjdscott profile image

      pjdscott 10 years ago from Durham, UK

      Incredibly detailed hub - the idea of eBay and listed vs. actual house prices in the US is frightening. I suppose the only consolation is that first time buyers should be able to get a bargain, assuming that they have a deposit, mortgage approval, good job prospects...

      I'll stop there! Ouch. I'm very glad to be over the mortgage 'hump".

    • Inspirepub profile image

      Inspirepub 10 years ago from Sydney, Australia

      I have dual citizenship, too - US/Australian, and I am married to an Englishman, so between us we can live and work anywhere in the Western world, just about. We choose Australia, but if our families were in the northern hemishpere, it would be harder, I think, being so far away.

      I'd love to visit Oregon some time - I have some very dear e-friends in that part of the world.

    • Mary Tinkler profile image

      Mary Tinkler 10 years ago from Gresham

      As I told Lissie on one of her hubs....I DID think about immigrating some years back. in fact on several occasions over the years....Australia, NZ, Canada. Canada was especially appealing as soon as this dreadful needless Iraq war started.....I was like the Dixie Chicks from the start..... I was against the war when everyone here was screaming get-the-bastards patriotism. Too many people don't know propaganda when they see it, don't read or research. Sheep. I came of age during the Viet Nam war; I remember how this ugly nonsense works. And how it ends. The hubris just embarasses me. What MUST the world think?....and I am not like THAT!

      I hold a duel citizenship. Naturalized U.S/U.K. I have always felt more British in character than American, (and so my friends tell me) and I have always taken some egoistic pride in my heritage and upbringing....British child, British manners (at least the manners from my parents time in England). But my family here would have been very hurt & upset if I had up and left the country they chose to settle in. 20/20 hindsight.

      Anyway Oregon is a very beautiful place. And I can't go any further west without getting my feet wet.

    • Inspirepub profile image

      Inspirepub 10 years ago from Sydney, Australia

      Oh, yes, this is God's country all right!

      And remember it doesn't snow here, except in the mountains, so heating costs are much lower.

      We also have free education of a really high standard up to the age of 18 (equivalent to the end of your first year of college), a welfare safety-net, universal health care, the most tolerant multi-cultural melting-pot culture, very high consumer protection and food safety standards .... yep, Australia is a really good place to live.

    • Mary Tinkler profile image

      Mary Tinkler 10 years ago from Gresham

      Average rent for a 2 bedroom apt. here is around $700 -1000 per mo, or higher depending on area. Only water and garbage included. A house to rent is $900-1500 area sensitive. A $210,000 home to buy is rare in most cities in Oregon. Maybe about 800-1100 sf, 3 bdr. 1 bath and in need of cosmetics. Lot no bigger than 7000 sf, usurally 1 car garage or none. Often in a high crime area. Property taxes and mortgage insurance would bulk up the payments, another $200-300 a month. Heat and water and phone....add another $300-$400 per mo. Average home mind you.

      Average wage around $8 to 12 dollars per hour for office or medium skilled service sector worker. Minimum wage in Oregon is higher than the federal minimum of $5.85 an hour. (Can you believe it?) Oregon's minimum wage is $7.95 per hour, as of Jan 1 '08. 40 hour work week is standard. 20 to 30% of wages go to taxes, workman's comp, state and federal, and some local assessments. Heath insurance for a family runs a min. of $500 per mo., or varying figures if the person has part paid by their employer. Close to 30% of workers are not covered through work, and if they are there are still co-pays per visit and per prescription, and often very high spent by the insured before the insurance company will pay a dime. $5,000 is not an unusual deductable for a family. Auto insurance is high, and of course mandatory. Groceries for a family of four would run $400 - $500 per mo. conservatively. Then there are clothing, school supplies, gasonline, auto licensing and repairs, home maintenance if you own one.

      Your wages seem much more in line with the cost of living than the average here. Plus the health coverage is enviable. What huge differences, eh?

    • Lissie profile image

      Elisabeth Sowerbutts 10 years ago from New Zealand

      This is an interesting debate Mary and inspirepub - I find myself flicking between your respective hubs on the same subjedct in differnet countries - I am glad I got you 2 together! I am with inspirepub on this one though - yes a single person on an average income cant afford their dream house. They never could - in fact they never would have got a mortgagee a few years ago! What's changed in a generation is that the money supply has loosened up - my mother couldn't get a mortgage on a freehold property she owned in her own name in the 1970's - because her husband wouildn't countersign!

      Also I think expectations are unrealistic - talking to the agent who is trying to sell the flat we are renting which is a perfectly comfortable 2 bed, 1floor up, covered parking , 500m from the beach, nice block 10km from the CBD - young couples don't want it - its too small ROTFL! They want at least 4 beds/2 baths! Our flat is on the market for low $300's which I think is affordable - a mortgage at 9.2% - floating you'd do better fixed - for 30 years P&I is about $2500 / month -the average wage in Perth is about $1000/pw - for a couple both working I can't see a problem.

      Its a cultural problem too - next door (same size flat ) has just rented to an Asian lady with 2 children - they seem perfectly happy - they don't seem to need 4 beds!

    • Inspirepub profile image

      Inspirepub 10 years ago from Sydney, Australia

      Oh, there isn't anyone going homeless over here!

      "Affordable", according to the RBA, means that you are spending less than 1/3 of your after-tax income on housing.

      The average income here is about $55,000, just over $1000 per week. After tax, that comes down to $829. Rent or mortgage payments of $276 per week ($14352 per year) would be considered "affordable" at that income level.

      To buy. at the current rate of 7.25%, borrowing 80%, and have that much as your monthly mortgage payment, you could buy a house or apartment for $247,448.

      In Sydney, Australia's most expensive city, this amount would get you a 2-bedroom apartment on the train line 15-20 minutes from the CBD, or a three-bedroom house within walking distance of shops and schools in an outer suburb.

      In a smaller town, for example Armidale (a college town half way between Sydney and Brisbane), you would only need $210,000 to buy a large brick 3-beroom home on a large block with elaborate established gardens and a three-car garage.

      Of course, most families buying a home in Sydney have two incomes, which means they can afford up to $480,000 by the Reserve Bank's criteria. The truth of the matter, though, is that most people are willing to spend more than 1/3 of their income on their housing, if it means they can get something bigger, or closer to the middle of the city. This willingness is what keeps prices in the zone that the RBA considers "unaffordable".

    • Mary Tinkler profile image

      Mary Tinkler 10 years ago from Gresham

      How is it ever a good thing that people, humans, cannot afford shelter? Owned or rented. If people work their lives long, and pay taxes so the common good can be addressed, affordable shelter should be a right.

    • Inspirepub profile image

      Inspirepub 10 years ago from Sydney, Australia

      Interesting that you see it that way, Mary - this is a story about how house prices in Australia are remaining high - how is this bad news?

      If values were plummeting, as they are in the US, THAT would be bad news!

      I know journalists like to put a negative spin on everything, but seriously - if falling values are bad, values staying high can't also be bad, surely.

      Here in Australia, as it says in the article, people are beating their breasts and crying "foul" because not everyone can afford to buy a house in a major capital city.

      It has never been that case that workers earning less than the average wage could afford to buy a house in a major capital city. There was a brief time, back in the 70s, when women entered the workforce in large numbers, and suddenly the earning power of an average faily increased by about 50%, and it took about 10-15 years for house prices to fully accommodate that increase. During those 10-15 years, lower income couples could and did buy homes in more affluent areas.

      However, as one of the comments on these articles mentioned, the average "house" was a lot more modest than the McMansions our first-home buyers are aspiring to own today. My parents washed their dishes by hand until we were teenagers - new homes all come with dishwashers, these days.

      I personally know a young man who started buying houses at age 18, and by age 22 owned ten and was cash-flow positive to the tune of $55,000 a year. They weren't in major capital cities, though.

      Houses holding their value is good news, not bad. And for those who are willing to make sacrifices and work hard, buying a house is never out of reach. It may not be a flash city house with four bedrooms and a pool, mind you. But it will be a house.

    • Mary Tinkler profile image

      Mary Tinkler 10 years ago from Gresham

      Seems like the news just gets worse...,2547...

    • suok3 profile image

      suok3 10 years ago from London/Vladivostok

      Maybe it is time for the rules within the global financial system to change?

      Perhaps the financial traders within the mortgage market should bear responsibilities when it all goes "pear shape".

      Do you think that those wizz-kids who have made millions from all this mortgage misery should in fact be made to repay their huge commissions?

      Are we going to witness millions more home owners losing their houses during 2008?

      What if all mortgagees decided over night not to pay their mortgage?

      Are the banks going to repossess all these homes?

      Food for this space..


    • Inspirepub profile image

      Inspirepub 10 years ago from Sydney, Australia

      Thanks for the comments.

      Yes, Mary made a comment earler about assuming mortgages, too. I have added a note to that section pointing out that it isn't common, for the benefit of future readers.

      There has been some really great discussion in the comments section, too!

    • profile image

      US Foreclosure 10 years ago

      Good well thought article, and good assessment of the US housing problems. I think you hit it dead on. There is one points that doesn't really effect the process as you explained. In the US, only a tiny percentage of mortgages are actually assumed, and the new borrower does have to qualify from the lender to assume the mortgage. I doubt it effect true value of "housing" at all.

    • Rob Jundt profile image

      Rob Jundt 10 years ago from Midwest USA

      This is one of the best explanations of the US housing crisis I've read. You are spot on in your analysis. It's a shame we're in the position we are but it's our own fault. Too many people simply saw easy and quick dollar signs and threw sensibility to the wind. Common sense should warn us that "gambling" on future inflationary prices and earnings (with respect to homes and wages) is a bad idea. Unfortunately a lot if us here in the US are bad. Great HUB!

    • Inspirepub profile image

      Inspirepub 10 years ago from Sydney, Australia

      Barry, what an awful situation.

      It is just outrageous that you can be forced into a situation where someone else benefits from your years of hard work in paying off that mortgage.

      I agree with you that the health care system in the US is also well and truly broken, and that sky-high health costs are one of the triggers that push people into situations where they are facing foreclosure.

      The US government needs to take along, hard look at itself - after all, when good, hard-working people lost the equity in their homes, it simply means that as they get older they will not have a nest egg and will become part of the growing social security problem.

      But then, if governments thought ahead they would have INVESTED all the social security contributions over the years instead of spending them, and there would be no problem at all paying for everyone's social security benefits in retirement, so I am not holding my breath for intelligent action from the US government any time soon ...

    • profile image

      barry2116 10 years ago

      This is my first entry on this site but I found the entries interesting, educational and stimulating.

      I just had to jump in here and express my gratitude for the information given, views expressed, and add my experience and opinion.

      The US housing market, I believe, is not going to get better for 1-2 years. A lot of good people have been hurt, some of whom have lost their homes and "nestegg."

      My wife and are are among the walking wounded. We were doing fine until I had major health problems and had to quit a very good paying job and go on disability. Within six months we were through our savings (what with doctors, hospitals, and housing costs) and facing preforeclosure. We eventually found a "white knight" who took over our position, paid current payments due, and paid moving and other costs to get us out and set up in an appropriate rental house.

      That company did the needed repairs and updating and made the monthly payments in our name so we didn't actually foreclose or default. But when the house sold in 3 months, they also made a sizeable windfall taking our equity minus their investment.

      The real culprit for our problem, as we see is, the health care monopoly in Virginia Beach (Sentara Medical System) and their high costs and group of lawyers and collection agents. I believe we would have been able to scale back and keep our house but the payments required to keep the hospital out of court and attaching assets left us with few options.

      Anyway, we are working our way back. The poor victims of the housing crash now will be years in getting back on their feet, if at all. This type of event is crushing to your sense of security, ego, and overall self-confidence.

      On a broader issue, the "subprime" loans (a misnomer in my mind) were quickly off-loaded to secondary markets and cleeared from their ledgers. (An indication that the banks knew they were "hot" and didn't want to get burned holding them.) They were even able to make some profit in doing so. Unfortunately, the buyers of those securities were the retirement funds of some of the very people who were consuming the loans. So when these loans defaulted it was a double whammy for those folks.

      Hopefully the Banking and Finance Committees of Congress will look over this whole mess and set regulations of disclosure (at least) and fiscal responsibility to the seller banks (better).

      Thank you for letting me vent.


    • Inspirepub profile image

      Inspirepub 10 years ago from Sydney, Australia

      I can understand how you feel about interest - I am sure I would too if I had grown up with it being deductible. Over here, interest is only ever deductible if the borrowed money was used for income-producing purposes. The mortgage on the house you live in is like interest on your credit card, or rent - a personal living expense, not a business expense. But I know that the US tax deduction laws are waaay more generous than ours in many, many areas, and I can understand why you wouldn't necessarily see this particular deduction as a structural problem.

      Consumer protection in financial services in Australia is mostly managed at a Federal level, by the Australian Securities and Investments Commission, which also oversees company registrations and other such regulations. They produce a range of consumer education brochures about your rights.

      The article you found was about the fact that our most recent (2002) Financial Services Reform Act, which brought in very tough rules about giving financial advice, but did not cover real estate, because real estate is not strictly a financial product as defined by the legislation, or mortgage brokers, because mortgaging real estate is not technically buying a financial product (unless you buy mortgage insurance as part of the process, and in that case the insurer is currently responsible for the advice given about the insurance).

      There has been a lot of discussion about the fact that the technical definitions excluding mortgage brokers need to adjusted to include them, and I am guessing it will happen soon.

      Most people don't use a mortgage broker, though - they just go to their bank.

      The Australian Banking Ombudsman is another really good consumer watchdog - one letter from them got me back $12,000 in fraudulent charges to one of my credit cards that I had been arguing with Citibank over for more than two years.

      They have a bulletin out about mortgagee sales:

    • Mary Tinkler profile image

      Mary Tinkler 10 years ago from Gresham

      You know we're gonna have to agree to disagree on this one. I really do consider that loan interest is an operating expense, not something consumed. I truly think that if equity was protected here we'd have an entirely different attitude from lenders regarding foreclosure. So I was digging around to find out exactly how your equity protection works in Australia & NZ....I'm not above writing letters to the "deciders" in my state & in DC with suggestions.....and I stumbled across this article about dicey lenders in Australia. It looks like your government is going to do something about it very soon....while I don't really expect any reform here until 2009, for obvious reasons.

      BTW if you have a good link to how your laws work, that are not in Greek, I'd love to see it.

    • Lissie profile image

      Elisabeth Sowerbutts 10 years ago from New Zealand

      Our mortgages and houses are in NZ floating rate 10.5% fixed 1 to 5 years between 9 and 9.95% today! Your rate sounds about right for Asutralia - but then you have CGT and sales tax and that's a whole new hub! Oh and I wouldn't sleep at night if we didn't have 50% equity in our properties !

    • Inspirepub profile image

      Inspirepub 10 years ago from Sydney, Australia

      Hooley dooley, Lissie, 9.5%?

      We managed to get fixed at 7.6% in December. Get a good mortgage broker!

      And Mary, as someone immersed in the US market all your life it would be hard for you to get your head around the perspective that 30% to 40% equity is prudent, I know. It is NOT as prudent in the US as it is elsewhere, because in the US your equity is so easily stolen from you if you have any problem maintaining the payments.

      However, it makes the housing market more susceptible to sudden downturns if people are given financial incentives to borrow the maximum they can afford against their homes. It makes evictions and foreclosures much more likely, and it makes sudden massive drops in "value" happen, in a way that they simply will not happen in a market where home equity is financially encouraged.

      I agree with you Mary, that it would be better if the US market was restructured to provide better protection for home equity - unfortunately, I think that too many people are emotionally wedded to those tax deductions for their home mortgages, and there is no way that any politician would dare reform that little item.

      Which means continuing instability in the US market for the foreseeable future.


    • Lissie profile image

      Elisabeth Sowerbutts 10 years ago from New Zealand

      Mary in Australia and NZ (and the UK I think) you cannot claim a tax deducation for interest paid on your own residence -why should you - its consumption not investment ? Obviously investment properties you can claim all sorts of expenses including interest paid but not on your own home. I agree with inspirepub - it I can claim my home's mortgage interest as a deduction I am laughing all the way to the bank - in fact it means I'm an idiot to rent - because I can't claim as a rent deduction can I? So if I can find somewhere to own for the same interest payment as my rent surely I am making a saving of whatever your tax rate is 30% maybe? And why would I save and buy something like a car when I can just refinance the house and then effectively have the car on a tax deduction too - it make a lot more sense as to why some people are very over-committed. OF course they get overcommitted here to but to be honest anyone who borrowed at a fix rate 5 years ago at 6% and thought that in 5 years time they would be able to refinance at the same rate were idiots - I am please to have had the 6% but not at all surprised that the new loan this year will probably be about 9.5% - its how mortgage rates go in this part of the world!

    • Mary Tinkler profile image

      Mary Tinkler 10 years ago from Gresham

      "A tax deduction for mortgage interest payments on your place of residence is a flashing light invitation to people to over-borrow and maintain minimal equity. It is a complete disincentive to use the home as a form of forced savings."

      What? No I don't think so. Just the opposite.And the savings could be spent on health care, which is NOT state funded here. We have to budget for it. People are not deliberately maintaining minimal equity! They got talked into loans they didn't understand, loans so tricky you'd have to have a PHd in economy and a magnifying glass to get how they could bite you in the butt. When the market began to soften and values flatten and interest rates on the ARMS jumped....then they were told their credit was no longer good enough. It was calculated to rob people. They could negotiate interest rates, but they often times won't. You can't even reach them on the phone.

      "The market must have been on a knife edge for at least 5-10 years, since the Tech crash, if not before. I guess that's why the increasingly risky loan structures were developing, trying to keep it heading upward."

      No. Real estate is always a good investment, even now. Remember the market has only just recently gone south by about 10% and even that isn't everywhere. It is a limited commodity. God isn't making any more land, just more people who will always prefer to OWN their shelter. The ARMs were being hard-pushed for only a few years since Bush has been in office. I had a lot of buyers whose lenders tried to sell them an ARM, when they qualified quite easily for a 30 yr fixed! GREED. And preying on the naive.

      And one need not have as much as 30 to 40% equity to survive. The risky loan structures were developed not to force the market upward....they were developed because the loan originator made lots of money, and the funky loans could enable lenders to fleece the public, and the entities they sold packages of dicey loans to. They just forgot that sooner or later wages have to match the growing debt load. There is a saturation point. It backfired on the last financial institution to purchase the loans.

      Or did it? AS I stated in several articles...our laws are different and the bank can take back the house and get the whole pie. I think it was deliberate and is still going on....Simon Legris types turning folks out of their homes and selling and grabbing all the borrower has invested...far beyond what is owed. It would be so much better to level the interest rates, and not flood the market with reposessed properties.

      The mortgages do not always have to be for every penny the house is worth for the borrower to be in trouble. did you read my Mortgage Horror story? If the trustee hadn't caught up with the first lender the borrower would never have seen the money back and the house would have been forelcosed. Despite all the property owner's best efforts. The banks will be lapping up the equity gravy.....because they can, legally.

      Also remember that because of the down-turn jobs are being lost. How could the borrowers be to blame for that?

    • Inspirepub profile image

      Inspirepub 10 years ago from Sydney, Australia

      I see - that's what I thought. Thanks for the reference site, too - very handy.

      A tax deduction for mortgage interest payments on your place of residence is a flashing light invitation to people to over-borrow and maintain minimal equity. It is a complete disincentive to use the home as a form of forced savings.

      There are so many factors pushing Americans to borrow to the hilt and not have any equity in their homes that it is a wonder the boom market lasted as long as it did before coming undone. The market must have been on a knife edge for at least 5-10 years, since the Tech crash, if not before. I guess that's why the increasingly risky loan structures were developing, trying to keep it heading upward.

      If people have a good cushion of equity, say 30 or 40 percent, they can sit out a downturn without being forced to sell at a huge loss. Or they can sell and downsize.

      If they carry a mortgage for every penny the house is worth, and buyers get scarce, they are left with no options once they can't make the payments.

      It's really tough.

    • Mary Tinkler profile image

      Mary Tinkler 10 years ago from Gresham

      You cannot write off your payments. You can wirtie off your But that is one of those flex IRS issues. It's not always the same percentage of deductions from year to years. Capital gains taxes are year to year mysteries as well. The tax laws here are like an unabridged dictionary.

      Quickest info is quoted from (Might be a good research site for you, Jenny.)

      "You can deduct the interest you pay on the mortgage for a second home just as you can for the first one. The IRS will actually let you write off the interest on two separate homes for up to combined total of $1 million in mortgage debt.

      For instance, if you owe $750,000 on one and $250,000 on the other, you can write off all the interest payments. If, however, you owed $750,000 on both homes, for a total mortgage debt of $1.5 million, you could still write off the interest on the first $1 million but not on the remaining $500,000.

      If you own three homes, you can write off the debt on only two of them, but you get to pick which two to deduct.

      That tax deduction applies even if your vacation home is outside of the United States."

      Of course there is much more to it than this short answer....the IRS's motto being "if you can't dazzle them with brilliance, baffle them with bullshit". Who me, cynical?

      Tax law differs between a primary residence, a rental and a vacation home...even if you do rent our the vacation home part of the year. You can actually write off more on a rental than on your primary residence. Which may have been part of the appeal for flippers and amateur investors in these past years. I'm looking forward to seeing some green energy and other environmentaly friendly deductions. WELL, we are all hoping for a big shake-down in DC. the year cannot go fast enough....and I have NEVER said that in my life.

    • Inspirepub profile image

      Inspirepub 10 years ago from Sydney, Australia

      Mary, are you sure there are no longer deductions for home loan payments?

      There is a 2006 deduction calculator online here:

      And a 2006 article about the deduction says "Homeowners in a single congressional district in California, the 14th District in Silicon Valley, took more in mortgage interest write-offs than all the residents of six whole states combined, claiming $3.2 billion in mortgage interest deductions during the year covered by the study. By comparison, $2.9 billion in write-offs were recorded by residents of Vermont, Wyoming, Alabama, North Dakota, South Dakota and West Virginia. The average write-off in that particular California district was $35,000, compared with an $9,500 average nationally."

      The 2005 Federal Taxation Basic Principles certainly indicate that the homeowner is entitled to a deduction (although not if someone else makes the payments for them when they are having financial trouble - so borrow from Dad and make the payment yourself, don't let Dad pay the bank direct!)

      Did something change between 2006 and now?

    • Inspirepub profile image

      Inspirepub 10 years ago from Sydney, Australia

      Interesting to hear how things are shifting, Mary.

      I am not blaming the average borrower - it is just an indication of the woeful state of financial education in general that people can be so easily conned into high-risk situations.

      And don't get me started on mortgage "insurance" - what a SCAM! If the lender wants to insure their risk, why don't they pay for the insurance? Honestly! That particular one is the same over here, but you don't have to pay it if you are borrowing less than 80% of the value of the house. All the more reason to have equity!

      There is no such thing as a 30-year fixed mortgage here - five years is the longest you can fix your interest rate. Most people are on variable (adjustible) rates most of the time, which is why we find it hard to understand all the wailing about how unfair it is that some people can't fix their rates for 30 years - nobody has that luxury over here!

      It does make people a little more cautious about committing to payments for other things (or it should, if they are reasonably well educated!), knowing their mortgage payment may go up.

      I find your stories hair-raising, and I have nothing but sympathy for any individual trying to save their home from heartless lending institutions. In fact, I have made comment about that in the introduction to the book I am currently writing about why financial education is a MUST these days.

      I can tell you, though, I have a friend who assumed a mortgage last year, so it is still happening. I don't know the legal detail of how they arranged it, but apparently it can be done.

      Keep writing, Mary - these stories need to be published!

    • Mary Tinkler profile image

      Mary Tinkler 10 years ago from Gresham

      You cannot deduct your mortgage payments in the U.S. You can, only recently again, deduct the cost of mortgage insurance...which insures the loan and the lender, not the borrower. Not hearing much talk about that though, are we?

      Many of the "valuations" and I assume you mean what we call appraisals, which are done by licensed professionals and should, but rarely do, include a throrough top to bottom inspection of the house. They are supposed to use recently sold comparables to value the property. If there are none they are supposed to "build" the house on paper, what would it cost to create from scratch. I have NEVER know an appraiser to go that route. But like the lenders, they have little or no accountablity after the fact because the market does indeed fluctuate, no house is exactly like the next one. Realtors, on the other hand are highly regulated and liable for even matters they had no way to know about. for instance a leaking underground sewer pipe found six months after the buyers moved in. Not my sale but a co-workers. We carry errors and ommission insurance with hefty deductables.

      In recent years the appraisers in the U.S. were indeed compliciite in the mortgage nightmare. Minimum $400 per. Hired by the lender. Really, it came down to "drive by" appraisals....if the house existed the money was lent, the appraiser gets paid either way. And no, our equity is not protected, but it's one of the reforms I'd like to see. the concept is so froeign to Americans, most couldn't imagine that kind of fairness. A goodly number of naifs borrowed against or took the equity out of their homes.'s not that they disregard their equity, too many do not understand equity. The fact that many used the cash to improve their home and add value is little consolation now supply and demand have sunk values, and loans are harder to get. When the appraisals were meaningless was at the peak of the hot market. They have a great deal of meaning now.

      In the end I cannot malign anyone, whether misguided or uninformed or reckless, or too trusting, for wanting to own their own home and believing GW Bush's promise they could aspire to it. Lenders told ARM (Adjustable Rate MOrtgages) borrowers they could refinance when the new rate kicked in. Some of the ones who got in early did...before prices fell. Many who have changed nothing in spending or debt load now cannot refinance because of the newly stringent lending guidelines.....what was good enough for a loan before, now isn't. Another cheap shot if you ask me. Regardless, all of these people just wanted a home, they really aren't pigs at a trough. There are a lot of families suffering here and our government has no statutes in place to help them. It's a horrible thing, losing your home, I wouldn't wish it on anyone. I know much of the rest of the world feels schadenfreude over the housing distress here. Try to remember these are people in crisis. And lender in the UK are going belly up too...folks in crisis there as well. UNfortuantely a global economy results in a global meltdown. I really do hope your laws keep you all safe. Those laws should be a blueprint for what we must do here.

      BTW assumed mortgages are extraordinarily rare....really a thing of the past.

    • Lissie profile image

      Elisabeth Sowerbutts 10 years ago from New Zealand

      I must admit I am torn between Australia and NZ - NZ has more sensible tax laws and far less red tape in general but Australia has such a wonderful climate and lots fo work- but I am very sure I don't want to live in the US!

    • Inspirepub profile image

      Inspirepub 10 years ago from Sydney, Australia

      It won't be foreclosures, not here. Mortgagee sales, at worst. I am so glad I live here and not in the US!

    • Lissie profile image

      Elisabeth Sowerbutts 10 years ago from New Zealand

      Thank you! I knew there were differences with the US market but I have never understood their financial ramifications - I hadn't realised that Americans don't have the same protection of their equity as NZ/Australians do - in fact I found this hub to be absolutely fascinating from the American point of view

      I think this is one of the great thing about hubpages - its rare to get type of cross-cultural exchange going on something like mortgages - but here in Oz we are bombared by the media saying woe the US foreclosure rate is up and everyone here thinks it will happen here too - maybe it will but for very different reasons !