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Readers respond to Work & Money and Business section coverage

What happened? Homeownership isn't revered nowadays

There were two letters in Sunday's Work&Money section asking about private mortgage insurance and foreclosures. I have a couple of simple answers to very complicated questions.

The first question was: Why didn't private mortgage insurance cover many of the problems of so many defaulted loans. Simple: It was not required or bought on most of the loans.

In the mid-1990s, instead of paying for PMI, borrowers started taking a primary mortgage at 80 percent and a second (and sometimes a third) for the remaining "down payment." PMI had protected the top 20 percent of the loan, and it was replaced by companies willing to put up the money for a substantially higher rate than the primary loan. Often, buyers put up no down payment, which makes it much easier to walk away if anything goes wrong.

Another question was: Why so many foreclosures? That is complicated and has as many factors as why Rome fell. Start with vast numbers of home buyers putting up none of their own money. Add that the lending standards have changed dramatically since I started selling homes in 1986.

Buyers had been allowed to borrow an amount equal to only one-quarter to one-third of their take-home pay as a mortgage. They had to have good credit, as determined by a human looking at the credit history, to see whether bills got paid on time.

For about the past decade, we've had people to whom most landlords wouldn't rent buying homes. Add to the loosened lending requirements the adjustable rate loans. Although rates were in the single digits (low by the experience of most people of home-buying age), buyers were opting for rates that were guaranteed to go up and mortgages that never paid down any of the principal balance.

Add the huge numbers of people who had a decent mortgage that they could pay who decided to refinance their homes and use the cash for spending money. One of the writers asked about the "mission of homeownership." That's how most of us over 30 were raised, but somewhere, it was replaced by the idea of literally spending your home. I can't explain how we went from a society that revered home ownership above all to a society that revers the latest fashion more.

Why did this work for so long? For one thing, as long as home prices kept rising, the borrowers could sell out or refinance. People started buying multiple properties and selling off the "extra" homes for a profit. This extended the saturation point of one house per family.

In regard to the reader's question of homeownership for low-income families: Some investors will allow a family to rent their homes with the option of owning it when they can swing the mortgage. This is a very small number of investors, and you should check into this very carefully. Every profession has bad and good people in it. Before you sign a contract to get into or out of a house, you should consult with professionals such as lawyers, Realtors, CPAs, etc. This is usually the largest financial transaction people make. Get quality advice on it. Pay a little now, or you could pay big time later.

I'll throw in a little information that wasn't directly asked. If you are thinking about allowing your home to be foreclosed on, please seek good professional advice.

For example, you may owe the IRS tax on the money the bank lost. The rules on this are changing almost daily and are so complex as to hinge on things such as whether you ever refinanced your home.

(Cynthia LaChapelle owns LaChapelle Properties in Cary and has been a Realtor in the Triangle since 1986. She is also a board member of the Triangle Real Estate Investors Association (www.treia.com).)