So what is "too big" a house? In DuPage County Illinois, where I live, if you bought new the average cost of a house was $325,900 in 2006. The median price of a detached house: $431,998. Median real estate property taxes for homeowners with a mortgage in 2007: $5,043. Source. This isn't a cheap place to live, but it is less than a 45 minute drive to work, where I grew up, and where all my family is.
So lets say I'm a first time home buyer who is just married, and I go to a mortgage broker and like a responsible person ask "How much mortgage do I qualify for?". The Mortgage Broker, looking to make a commission for himself and a tidy profit for the bank, qualifies me for a $250K mortgage. I've never bought before, so I'm thinking, Great! I can buy $250K. That's not going to buy much in DuPage County, but I can quit renting and live the American Dream. So I go out and buy a house at the going market value at the best interest rates at the time for a little less than $250K the broker told me that I qualify for.
See what this irresponsible behavior of mine gets me after the jump...
Now it's four years later and my house is worth 25% less than I paid for it. I've made all my payments on time. I've even improved the place. But now my job is in jeopardy, my wife had to have surgery my insurance plan didn't cover, and my property taxes have gone up raising my mortgage payment in the process. I'm not spending a dime on anything I don't need, not saving a dime for my retirement or child's college, and trying my best to pay down any and all debts. In a consumer driven economy, my lack of spending is now a big part of the problem.
I'd like to refinance my loan. But I can't. I don't have the required 80% 20% equity. My house is now worth $187K but I owe $225K. I don't qualify for a re-fi. Even though it's the same house that I've paid all my payments on time. In the four years I've been paying my mortgage I've paid approximately $72K in principal and (mostly) interest. The bank has made $72K off my responsible behavior. (assuming 5% down, and 6.5% APR).
But the Wall Street Bankers would rather I default and have my property foreclosed than help me be responsble and refinance. The bank doesn't want to take the hit and lose their profits by going to a lower interest rate, despite the $72,000 they've already made off of me. They'd rather foreclose should I default as the actuaries tell them the profit margin is better.
Better for the Wall Street Bankers, not me or the economy or the country.
Who's the loser being irresponsible again?