Mr. Wyman is a member of the bar, but is occupied primarily as President of Wyman Associates, Inc., realtors and insurors, of Painesville, Ohio.
Our vanishing gold, and the toughening of competition in world markets long treated as their private preserve by American exporters, are among the international consequences of inflationary policies here at home. Thus does the world economy censure and eventually apply brakes to the profligate spending and loose fiscal and monetary policies of any "welfare state."
The real estate business in the United States illustrates the dangers of reliance on continuing doses of inflation. Now we begin to see the foolishness of governmental policy as reflected in Federal Housing Administration and Veterans’ Administration financing regulations based on "nothing down and 35 years to pay." The result is showing up across the land in the person of the "walk away." The walk-away is commonly the FHA or VA mortgagor who, with the advent of a reasonably stable dollar, discovers that the mortgage he owes on the home he "owns" is larger than its present market value; so, he abandons it—just walks away!
Let’s trace a hypothetical Joe Citizen into this increasingly common situation. Two years ago Joe and his wife bought a "project" home. It probably was in Florida, California, or Texas, where both the building boom and the financing liberalities have been most accentuated. Joe paid nothing down and his monthly payments were proposed to amortize the mortgage in 30 years. The price? That didn’t really concern Joe, so it needn’t concern us. He and his wife liked the place better than any other they’d seen. The salesman had checked the regulations and said Joe’s earnings justified the monthly payment. Joe and his wife agreed that it was ridiculous to pay rent, even though his job was uncertain and he might wish to move before long. Besides, the rent asked for anything comparable was as much or more than the monthly payment would be.
Let us recall that the Federal Housing Administration was introduced in the depression-deep 1930′s as a pump-priming device to encourage building and heavy industry and jobs. FHA was a guarantee to banks and other mortgage lenders, enabling them—if they followed prescribed rules—to make longer and more liberal loans on residential reality. They were to collect a prescribed interest rate, one-half of one per cent of which would create a sinking fund from which reimbursement would be made if a borrower’s default resulted in a loss to the lender. The scheme appeared to work, though other methods involving less federal intervention might have been equally effective. At least, most persons in the real estate business thought it to be wise legislation. It wasn’t an obvious subsidy, and it more than paid its own way. It up-graded architectural and construction standards by demanding certain minimums for loan approval.
The FHA administered reserve created by the.5 per cent has accumulated through the years and even brought talk of reducing the rate. That the reduction hasn’t occurred may be for the best, since those reserves seem destined for large caliber tapping in the near future! The reason, of course, is walk-away Joe Citizen.
Will Joe actually disregard his solemn contract to pay? Will he be that unconcerned about his moral obligation, to say nothing of the legal one? What do you think?
In my own office not long ago we discovered we’d sold a house to a salaried man who had been twice through bankruptcy. The second time was only recently, but as promptly after the first (7 years, I believe) as the law allows. The lending institution discovered this fact from a credit report; nevertheless, it approved the loan application. This was not the case of a business bankruptcy. This was an improvident person who either couldn’t figure or didn’t care that his income was unequal to the installment payments incautious merchants permitted him to assume. It is quite true that he couldn’t have gotten in this predicament without the cooperation of a multitude of shortsighted credit-extenders. And for these we need have little sympathy.
The point here is that in the home market Congress has progressively created from an originally single-purpose act of legislation a multi-faceted, cross-purposeful, contradictory catchall of muddled, meddlesome regulations which President Kennedy would like to further dignify with departmental and cabinet status. Where did we go wrong? Within five years of FHA’s creation we were tooling for war; instead of wanting to stimulate the housing industry, top policy was to discourage the use of either manpower or material for such purpose. But Congress topped FHA with the so-called GI Bill which granted extraordinary financing privileges to veterans. The FHA and VA combined to stimulate feverish activity in the residential housing field. With an artificially created demand greatly exceeding the available supply, home prices raced ahead of the expectations of both veterans and civilians.
Meanwhile, the originally benign bureaucracy of FHA had multiplied and complicated itself in the traditional way of all government agencies. Successive Presidents demanded of Congress extensions to the original undertaking so that FHA’s burden now includes giant apartment projects and retirement housing developments (which builders have figured how to produce with 100 per cent finance and no immediate risk), mobile home parks, swimming pools, bomb shelters, and so on. In addition, the Department of Agriculture has a separate and equally generous program for worthy and unhoused would-be farmers.
The congressional acts creating both FHA and VA established the interest rates which might be levied by lenders under guaranteed loans. The provisions for change are so cumbersome that these rates have lagged behind the prevailing rates in the money market for years. Time and again, lenders have been unwilling to divert funds from more productive use; to the chagrin of FHA and VA functionaries, "too few" such loans have been made. The remedy has been to permit lenders to charge certain fees or work out kick-back arrangements with builders which help to bring the lender’s net return in line with "free market" rates of interest. The governmental assumption is that this latter simply reduces the builder’s profit and thus constitutes a deflationary influence! The fact is, however, that builders do not continue to build if they are denied a profit. No matter how they may be concealed, the costs of sale are inevitably absorbed by the buyer. The price Joe Citizen agreed to pay for his house included all those costs.
What was originally a simple guarantee to expedite the purchase of a home has become an intricate, exasperating, conniving "deal" which often must seem to the typical citizen a shoddy racket. Having suspected from the first that he was a pawn in a fancy bunko game between builders, brokers, bankers, and bureaucrats, is it any wonder if Joe Citizen simply vacates his bad deal with a "serves ‘em right" attitude and moves on to greener fields, his trust in his fellow man tarnished by his own failure to understand what happened to him or why?
Depreciation Is a Fact
Here are the basic facts, so long concealed by years of inflation: (1) a commodity is not used without wear nor sold without depreciation, (2) equity of ownership is accumulated only if the outstanding debt is paid off more rapidly than the commodity deteriorates, and (3) thousands of homes across the nation carry mortgages greater than the present liquidation value of the property.
Many questions remain unanswered:
Have our political leaders the will or the ability to maintain a stable currency? If so, more walkways may be expected.
Will the FHA and VA regulations continue to demand that the injured lender pursue all legal remedies against the defaulter, such as deficiency judgments, the garnisheeing of wages, and so forth? This will be mighty unpopular!
Will our government dare permit the repossessed homes to be sold to the highest bidder in the time-honored and legally prescribed manner? This will also be unpopular, especially as it begins to throw a spotlight on the difference between the sale of real estate and the sale of "easy terms." And in that event, there may be demands from building organizations that the homes be withheld from the market—stockpiled!
The fact is that excess stimulation and other government intervention has caused a surplus of housing in many areas. A free market would absorb this over a period of time in its ruthless but healthy fashion. Unless government is restrained by responsible citizens—hauled back to its proper and limited function of keeping the peace so that a free market may function to regulate building, finance, and other business affairs—then ours may become just another lost civilization comprised of irresponsible walk-aways.