All Commentary
Tuesday, May 1, 1962

The Walk Always

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.

Blooming Bureaucracy

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.