CHAPTER

4

The Mortgage Trap

We shape our buildings, and afterwards our buildings shape us.

—SIR WINSTON CHURCHILL

Home is a concept that draws on some of our deepest emotions. It is closely tied to our ideas of family, security, and the American Dream itself. Because it carries a symbolic importance much greater than most of the big financial decisions we make, the dream of homeownership can lead to major financial mistakes.

In fact, it is a cultural myth that to have a good home, you must own it. It is even more misguided that so many Americans see it as an essential step toward wealth and status. In fact, the number one financial sinkhole for working families is a monthly mortgage payment that is simply too high. “It’s time to move beyond the subprime mortgage meltdown and ask a more fundamental question,” Clive Crook wrote in a brilliantly prescient essay published in 2007 in The Atlantic. “Is it good for society that Americans aspire to own homes, rather than merely live in them?”¹

Okay, that is a tough question. But I know this: you need to take a hard look at all your options before you anchor your financial ship to mortgage debt. In many ways, mastering money is about becoming the master of your mind and sorting out financial truth from truisms and myths. This is what this chapter is about.

Unfortunately, there is a scam out there that preys on our desires and perpetuates the homeownership myth. It starts with the federal government, which makes it easy for Americans to get mortgages they can’t afford. The two government-sponsored mortgage entities, the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) guarantee mortgages so that Americans get 30-year loans that are unavailable in most other countries. When the Fed keeps interest rates artificially low, as it did after the 2008 financial crisis, it saturates the American economy with cheap money that can be lent to home buyers who probably should not take the plunge. All of this is effectively a subsidy for home buying. Developers and the real estate industry love it because they can keep developing and selling. Unregulated mortgage brokers and financing companies love it too because the more loans they write, the more they profit. The result? Housing demand rises, and so do home prices, eventually into crazy land, as during the last boom and devastating crash in 2008. When housing markets “adjust,” however, millions of everyday people who played by the rules and scrimped for their down payment can be trapped. Renters can move to lower-cost housing. Homeowners—or, more accurately, those who owe mortgage debt—are frequently anchored in place. Foreclosure is often the result.

I am hopeful that with the introduction of smarter policies, this will change substantially in the years ahead. But the reality is this: standards of living and incomes in America haven’t risen enough to justify our high rate of homeownership, which is more or less equivalent to post–World War II levels (a time of unmatched American prosperity). People are going deeply into debt for their homes, and the federal government is mostly to blame.

THE MONEY EARTHQUAKE OF 2008

Numerous books have provided scathing and unforgettable reporting on the abuses of the mortgage “gold rush” preceding the 2008 crash. Investment banks such as Merrill Lynch held trillions of dollars of subprime mortgages on their books in the form of esoteric investment instruments. At the end of a long chain of financial wheeling and dealing were unsuspecting citizens who had bought into the subprime mortgage scam—typically with a great deal of naiveté. Sadly, before the crisis, Congress had mandated that banks make more subprime loans to “underserved” populations, which fueled the rush to provide mortgages to people who were unable to weather a financial storm.²

In the book by former Lehman honcho Lawrence McDonald (with Patrick Robinson), A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers, McDonald recounts an undercover trip to Los Angeles to check out New Century, one of the “mortgage factories” selling billions of dollars of mortgages every month, many of them subprime. Lehman Brothers and other players on “the Street” (Wall Street) knew at this point in the market that “no one can afford to hold onto the scalding hot potato of subprime mortgages that cannot be sold.”

McDonald was sitting at a restaurant next to the New Century offices with his partner, waiting for the “body builders”—the buff, slick mortgage salesmen with gleaming teeth—to swing by for drinks after work. What the men found at New Century was a factory churning out thousands of subprime mortgages to unsuspecting buyers.

“Worse yet, the interest rate resets were about to kick in. We’d seen the documents. Hundreds of thousands of poor people were about to see their monthly payments rocket up from $800 a month to possibly $2,400 a month, maybe more. It had to be a house of cards, because these people could not afford that much,” McDonald wrote. The New Century drama as it played out in McDonald’s book is a fascinating example of what went down not only at Lehman Brothers but also in the entire financial sector.³

Stories of Foreclosure

We all make financial mistakes. I have pulled some doozies, such as renting an expensive one-bedroom Manhattan apartment during my first years working at a law firm, when all I needed was a studio because I was never home. In my pro bono legal work at Kirkland & Ellis, I’ve talked to low- and moderate-income Americans who are facing tough financial choices. I have seen the worry in their eyes and heard the pain in their voices.

The stories reach across every state and demographic. Take Brian Burns of Las Vegas, who bought into the Nevada housing boom in 2004, moving into a 3,500-square-foot house bought for $250,000 in 2004 and selling it for $650,000 three years later. Flipping houses at that time was easier than selling beer on a hot Sunday afternoon at Yankee Stadium. During the boom of the early and middle 2000s, financial gurus pushed the idea of using leverage (debt) to buy houses that could be spruced up and sold to the next sucker. The advice that sold the most books pushed the idea of buying as much real estate as possible, using as much of other people’s money as possible.

Brian was fortunate to have sold his investment property, but he was still overleveraged. As National Public Radio (NPR) reported at the time, “[Brian] decided to keep it in the bank and buy another, smaller house in a brand-new development in the town of Henderson, Nevada. Sure, the stucco tract-style housing didn’t have a whole lot of charm, but Burns didn’t care. He persuaded some of his friends to buy other houses in the neighborhood. He had cash in the bank, excellent credit, and he put no money down.”⁴

Many people who relied on debt in the hopes of building a real estate “empire” overextended their financial reach. But real estate investments are just one part of the tale. Homeowners who depended on the same mogul-based advice for buying their own homes also set their families up for financial disaster.

In 2017, Nobel Prize–winning economist Robert Shiller wrote about how get-rich hype and promises from house-flipping gurus seized consumers’ imaginations with envy-inducing narratives about “smart investors who were bold enough to take a position in the market.” A new gold rush was on, and the purveyors of these stories made it seem like riches awaited anyone audacious enough to take the chance.

As Shiller notes, real estate flipping “gurus” at the time urged amateur investors to leverage “other people’s money” to buy and redevelop properties. In other words, the game was to borrow as much as you can. Consumers heard a constant drumbeat about the upside of leverage in seminars and informercials but not much about the perils of leverage during the big kind of price drops that were just around the corner.⁵

Shiller’s analysis shows how our brains are susceptible to overconfident or optimistic biases—we want to believe we have greater control over a project or decision than common sense and evidence dictate. This is a common problem in mastering money and certainly in mortgage holding.

So it was with Brian.

By 2009, Brian’s house was worth only $140,000. The crash had devastated his freelance business. Money was tight. Brian stopped paying his mortgage, which destroyed his great credit rating. Brian “let the bank take his house and moved to Oregon to start over,” the story reported. By 2016, Brian had returned to Las Vegas, where he rented a small apartment.⁶

Then there’s Guillermo Gallindo and his wife of Revere, Massachusetts, who bought a house at the top of the market in 2005 for $450,000 with 5 percent down and a monthly mortgage payment of about $2,000. By renting out the top floor, the Gallindos could afford their mortgage payments—until the economic downturn cut into Guillermo’s own working hours and his renters fell on hard times. Meanwhile, the interest rate on his adjustable rate mortgage crept higher.

The crash cut the value of his home in half, and the bank wouldn’t renegotiate his mortgage. Guillermo believed in the American Dream and wanted to keep his house—his roots—until he could pass it on to his daughter. But after months of struggling to stay in their dream house, the Gallindos could no longer pay the mortgage, and the bank foreclosed. As of 2016, they rent a two-bedroom apartment.⁷

Naturally, homeowners with subprime loans with higher interest rates were hit even harder than other homeowners during the 2008 crisis and will be disproportionately foreclosed on in future recessions. During the peak of the boom, single women were the fastest-growing demographic taking out mortgages, particularly subprime ones. A 2008 New York Times profile of determined, hardworking single mothers Kue McIntyre and Anjanette Booker and their Belair-Edison neighborhood in Baltimore contained many interesting insights. Belair-Edison was a fragile but promising neighborhood comprised largely of single African American women with families buying their first homes. Many of these mothers acquired their first mortgage as a subprime loan from private lenders targeting aspirational home buyers who lacked good credit.⁸ In 2006, most of the neighborhood’s 6,400 homes were owner occupied.

The people of Belair-Edison worked, raised families, and believed that homeownership would secure their economic safety net. But the reality was different. When the real estate bubble burst, salon owner Booker saw her adjusted monthly mortgage payment “balloon” from $841 to $1,769; Kue McIntyre defaulted on her mortgage after losing her job. She’d taken two subprime mortgages motivated by the best of reasons—to move her family out of a high-crime, gang-troubled area to a safer, better neighborhood. If she had chosen instead to rent in a better neighborhood, Kue would have had better cash flow and more options for riding out a rough spot. Foreclosures were initiated on more than 400 Belair-Edison neighborhood homes in Baltimore between 2007 and 2008.⁹

In the years that it can take for families to begin to recover from a foreclosure, there is incalculable collateral damage—destroyed credit, separation from communities, and career and educational opportunities indefinitely delayed. While it’s tempting to assign blame when an American institution such as homeownership goes so awry, who’s most at fault is not the point. The point is that foreclosures are an indicator of excessive debt, which devastates individuals and communities. Foreclosures don’t just hurt the family that loses their home—they damage the neighborhood, the community, and the economy at large.

The crash also affected more affluent homeowners, who experienced widespread foreclosures as well as financial losses in the form of short sales—selling their houses at a loss. Economists note that it took longer for wealthier mortgage holders to burn through their savings, so this wave of troubles was delayed for a year or two. Unfortunately, middle-class and upper-middle-class African Americans experienced higher rates of foreclosure because they carried more mortgages from private lenders who had targeted minority families during the boom with riskier, high-interest, and adjustable-rate mortgage loans—stimulated by government policies to encourage lending to underserved groups.

Policy analyst Peter Ferrera of the Carleson Center and Heartland Institute has written extensively on the roots of this disaster. In examining where the foreclosure crisis began, Ferrara pinpointed the 1995 housing initiatives of President Clinton: “Under this new Clinton vision, it became federal regulatory policy to force the nation’s financial institutions to abandon traditional lending standards for home mortgages, on the grounds that those standards were racially discriminatory, as African Americans and other minorities could not qualify for mortgages to nearly the same degree as whites and Asians.”¹⁰

Prince George’s County in Maryland was an epicenter of this middle-class foreclosure crisis. One carefully documented 2012 report by Janell Ross in the Huffington Post highlighted the fate of Osita Otigba and his wife, Peace, who lived in Balk Hill, a new subdivision in Mitchelville, a nicely wooded suburb outside of Washington, DC. The Otigbas and their neighbors were African American professionals or business owners. Janell wrote, “This was an impressive lineup in most any community, but here in Prince George’s County, the most affluent majority-black county in the United States, the Otigbas and their neighbors were just part of the wave of well-to-do families who arrived in the years before the financial collapse to stake their claim on a 5,000-square-foot version of the American dream.”

Sadly, between 2008 and 2012, the Otigbas and five of their six immediate neighbors were underwater on their mortgages, and the Otigbas were living in fear “that an official foreclosure notice will arrive with an order to vacate.”

“‘I am like a tree that is on the verge of being uprooted by water,’ Otigba said, then sighed. ‘When that happens, think of all the other parts of the ecosystem that are upset, the streambeds that overflow, the problems that follow. That’s what it is like here.’”¹¹

Robert Shiller noted that while some may blame homeowners such as the Otigbas for being financially feckless, foreclosure is a social ill with far-reaching consequences. “What would this mean in human terms?,” Shiller wrote. “Picture a line of moving trucks extending for hundreds of miles: they are taking the furniture of countless families to storage lockers. Picture schoolchildren saying goodbye to their classmates. They aren’t going on vacation: they are being abruptly moved to the other side of town.”¹²

Innocence Lost

The big crash that unfolded from 2008–2010 has (incredibly to me) faded from the political discourse. If you aren’t paying attention, you’d likely think that its residual effects have vanished as well. But the scars remain for millions of families—families who in many cases drew down their savings, cashed out their retirements, and took on lethal adjustable-rate mortgages without a safety net or plan B. Why? Because they’d been sold on the belief that this was their chance to get in on the dream, to ride the American wealth engine to prosperity. They drank the Kool-Aid, and it was powerful, flavorful Kool-Aid. But several years have passed, and we should be wiser.

None of us can afford the luxury of thinking it can’t happen here. It can, it did, and it will. My advice is don’t get fooled again.

Between 2008 and 2012, more than 6 million families nationwide lost their homes during the foreclosure process or were in the process of doing so, according to the Center for Responsible Lending.¹³ Keep in mind that the Fed kept interest rates low (and Fannie Mae and Freddie Mac kept underwriting mortgages) before the crisis, even as the home sector had reached a frenzy.

THE MORTGAGE DECEPTION

The truth is that the last recession and the recklessness that led to it, while devastating and more severe than any in recent memory, was not an anomaly. Whereas foreclosure rates at the time of this book’s publication are at prerecession levels, even minor tremors in the economy expose the fragility of home buyers. Every decade or so, the housing market crashes, wiping out family savings, pushing people over the edge, and damaging neighborhoods. In response, interest rates (usually) go up, and lending standards tighten. But then a few years later the Federal Reserve, Fannie Mae and Freddie Mac, the real estate industry, and mortgage brokers all start the cycle again. Case in point, between 2009 and 2011, home foreclosures shattered previous highs.¹⁴ But now the housing machinery is back at it, once again pushing low-interest loans. Fannie Mae and Freddie Mac raised the permitted debt-to-income ratio for home loans in 2017, meaning that prospective home buyers can borrow more and leverage themselves more. This despite being bailed out by Congress after nearly imploding in 2008 because of defaulted loans.¹⁵

Single-family home sales are the highest in a decade, and home prices are sizzling in most real estate markets nationwide, with prices going up 5, 6, and 7 percent every quarter. The share of income Americans pay in mortgage debt has been steadily inching up since 2014.

In real estate, the sky is not the limit. Sooner or later, prices come down and interest rates go up. Those 3 percent mortgages, if they are adjustable-rate mortgages, will balloon up to 5 or 6 percent, and many people will be forced out of their homes when the monthly payments become too high.

According to the highly respected “How Housing Matters” surveys by the MacArthur Foundation, in 2015 and 2016, more than half of Americans had to make at least one major sacrifice to pay their mortgage or rent.¹⁶ These included getting a second job, deferring savings for retirement, cutting back on healthcare, running up credit-card debt, and even moving to a less safe neighborhood or one with worse schools. One-third of people said they or someone they knew had been evicted, foreclosed upon, or lost their home in the last five years.

I can point to many good reasons for entering, staying in, or returning to the home buying market, for refinancing, or even for buying up. But these are all dangerous decisions unless you truly have your financial house in order. Homeownership can be the American Dream or the American Hustle. Through the principles taught in this chapter, I want you to learn how to avoid the latter and save for the former.

Before I explain the financial traps of the mortgage deception, let’s find out how this whole cult of the mortgage got started: in the halls of Congress.

THE THIRD RAIL OF TAX REFORM

Commentators and elected officials have variously labeled the home mortgage interest deduction “the most sacred break in the tax code,”¹⁷ “sacrosanct,”¹⁸ the “Third Rail of tax reform,”¹⁹ and “an American birthright.”²⁰ But our Founding Fathers didn’t inscribe home ownership into the Declaration of Independence or the Constitution. No marches were held for this “birthright.” In many respects, the sacred status of this provision was an accident of history.

In 1913, Congress passed and President Woodrow Wilson signed the Revenue Act, reinstituting the federal income tax. The Revenue Act also allowed homeowners to deduct interest paid on home mortgages. This was a practical, not an aspirational, move: lawmakers wanted to allow taxpayers to deduct interest as a cost associated with generating income if they rented out their houses.

Historians find no evidence that Congress intended to encourage homeownership for its social value before the end of World War II. Homeownership rates then were far lower than today, income taxes were paid by few, and American citizens carried little debt in comparison with our current era.

The home mortgage deduction became a more prominent vehicle for upward mobility after World War II. Homeownership increased as millions of Americans rode the economic expansion upward. Banks and the Fed responded with lower interest rates and easily available 30-year mortgages.

With greater incomes, more Americans were paying federal income taxes. The middle class and upper middle class began to understand how the home mortgage interest deduction allowed them to cut their federal tax bill, lowering their effective mortgage interest rate further. Real estate lobbyists and home builders became outspoken advocates for the deduction. Property taxes were also deductible, a major benefit for homeowners in affluent high-tax states and densely populated communities with higher property taxes.

In 1986, Congress and President Ronald Reagan embarked on a major cleanup of the tax code that resulted in many changes. Policymakers eliminated deductibility for consumer interest paid on auto loans, credit cards, and other major purchases financed through debt. If you don’t remember, it may seem too good to be true: there was a time you could deduct interest on your credit-card debt and auto loans from your income on your federal tax return.

Through it all, the home mortgage interest subsidy remained intact. In effect, policymakers told America that the real estate industry was more important than the automobile industry or other forms of economic activity. Then the tax writers added an additional sweetener—permitting taxpayers to deduct interest on another $100,000 of loans secured by a home equity loan on top of their mortgage. Contrary to its image, Congress can be awfully generous to U.S. taxpayers and the banks that lend to them to buy real estate.

Little changed on the mortgage interest front until 2018, when President Trump and Congress put together and passed a new tax reform law. The lawmakers took a modestly courageous stand of trimming back the amount of debt eligible for the mortgage interest deduction to $750,000 while grandfathering in the previous $1 million ceiling for homes purchased before December 15, 2017.

In addition to lowering the mortgage deductibility ceiling, the bill limits the deductibility of property taxes and state and local income taxes to a combined $10,000. In states such as New York and California, where home prices and property and income taxes are high to pay for large governments with employees enjoying high salaries and government pensions, this change means that some homeowners faced bigger tax bills beginning in 2018.

DON’T GET CAUGHT IN THE FINANCIAL TRAP OF A HOME YOU CAN’T AFFORD

As we’ve seen, the U.S. government, the real estate industry, mortgage brokers, banks, and probably your mom and dad and your Uncle Frank have all bought into the mortgage deception. This is not to say that homeownership has no value. I own my home and have lived in it for many years. But the time to consider buying a home is when:

   You have saved enough money for a down payment and still have an emergency fund that will cover six months of expenses.

   You are confident that you can indeed put down roots for at least five years in one spot.

   You’re not buying at the top of the market or stretching to take on a mortgage payment larger than one-quarter of your monthly income. You can follow market cycles by tracking local real estate costs and comparing previous market “highs” with current prices.

Whether you currently own, plan to own, plan to sell, or are in financial trouble and aren’t sure what to do, I want you to be well equipped to see through the homeownership narrative so that you can better protect yourself. Arm yourself with research and a calculator to navigate these financial traps about homeownership and money.

I label them traps because aspects of them can be true and make sense at certain times for some people, but if you step in one at the wrong time, it can put a terrible bite into your finances and happiness.

Trap 1: Your Home Will Go Up in Value, Providing a Return on Your Investment

Over a long period of time, it is likely that the value of the home you buy will increase. But if you need or want to move, you may be stuck in your home during a recession or when your local real estate prices are falling. Not only that, but most of the money that you put into your home you never see again. You can’t deduct as many of the costs of improvements as you might think. If you’re not renting out a room or otherwise producing income with your house, it is hard to offset home-related expenses such as maintenance, insurance, and taxes. Good investments generate income, not expenses.

The money you invest in a house could be otherwise invested in instruments that offer guaranteed or relatively lower risk returns. Various studies show that stocks and bonds have outperformed home values over time. Consumer tax guru Kelly Phillips Erb makes the point in a wonderful column: “While it’s true that some homes do appreciate, so do many other assets. If you bought a house for, say, $200,000 thirty years ago, it would be worth $468,375.09 today. While that gain feels impressive, that appreciation is based solely on inflation—which means that, in theory, the same appreciation would have happened with any asset.”²¹

Trap 2: You Must Live Somewhere, So Don’t Buy a Home for the Home Mortgage Interest Tax Deduction

As I’ve noted in these pages, the benefits of the mortgage interest deduction are highly deceiving. First-time and other homeowners are often thinking, “Okay, I am paying a bigger share of my income for my mortgage than I am comfortable with, but I get these deductions from the taxes I pay to offset it.” Consumers are smart shoppers in looking at the cost of a new suit, a car, or medical insurance, which most of us judge on the affordability of the object’s price. But in shopping for mortgages, some of us allow our number we would spend on a home to go up because of what is often fuzzy savings on our tax bill. This is a vulnerability that many brokers and Realtors exploit to make the sale.

Many homeowners ultimately find that even with the availability of a mortgage interest tax deduction, their tax return isn’t affected because they are better off taking the standard deduction. In fact, only about one-third of taxpayers even have the option of taking the mortgage interest deduction. Even if you qualify for the maximum home buyer tax credit of $8,000, you need to compare that tax benefit with what you could potentially save by renting—and remember that juicy home buyer tax credit can be another arrow in the real estate agent’s quiver of pitches. And that’s okay, but consumer beware!

Owning a mortgaged house also inflates your debt-to-income ratios. If you had to borrow to buy your home, which most people do, the presence of that debt can weigh on your credit and ability to take out loans for other things, such as a new car. If you have a lot of student debt, that is already affecting what lenders see as your ability to pay. A mortgage will only drive that ratio up. A monthly rental payment could be as much or more than a monthly mortgage payment—but in terms of your credit rating, rent is calculated as an expense, not a debt like a mortgage.²² The debt you carry makes up a big piece of your credit-rating score.

Trap 3: Renting Is Just “Throwing Away Money”

Reuters finance columnist Felix Salmon emerged during the real estate crisis as a rapier-sharp voice reporting on the mortgage deception. He said of the bias against renting, “There’s this weird fallacy that somehow, paying rent is throwing money away, whereas paying a mortgage isn’t. But one of the commenters on my blog put it very well when they said that if you buy a house, you’re still renting; you’re just renting the money to buy the house rather than renting the house itself.”²³

The humble calculator can be a great friend in evaluating renting versus owning. Write down the numbers in two columns: (1) the costs of taking on a mortgage payment, home maintenance, insurance, improvements (if any), and property taxes for three years and (2) the costs of renting for three years, and if there are expenditures you would make for the apartment and not for the house (furniture, electronics), add those to the column. Calculate your tax benefit from taking on the mortgage. Do the math, and compare. If you save by renting, do you have the discipline to salt that money away for the future, or will you spend it? If you will save this money or invest it wisely as I demonstrate later in this book, then you are hardly throwing your money away.

Finally, and perhaps most important, renters are far more mobile. If the local economy tanks, a new job beckons, or you fall in love and want to move to Seattle, your cash is more liquid. The high transaction costs of buying a home have been shown to reduce labor force mobility and even increase unemployment.²⁴ If you are in a disadvantaged area with few jobs or bad schools, those high costs can keep you there.

Trap 4: If You Encounter Financial Woes, You Can Sell Your House

This trap won’t bite if you time everything right and sell your house at a profit that you can use to bolster your financial situation. You then need to be able to move into a rental that will cost you less than your house so that you can use your sales profit to pay down debt and buttress your emergency fund. But having success with this strategy is rare. If you need the money when your house is underwater, obviously selling it won’t help at all. And even if you sell at a modest gain, you will be walking away from what the house could make on the market in the longer term.

In many cases, as I’ve shown in these pages, you got in a hole because you took out a mortgage you couldn’t afford and used your emergency fund for a down payment. I’ve also shown how volatile the real estate market is. The same economic storm that washes out your property values can be the one that takes out your job as well.

When you sell, your capital gains above $500,000 from selling the house are taxed (if you are filing jointly and have used the house as your main domicile for two of the last five years).²⁵ But if you sell your house during a tough time, even if you do not (and probably should not) buy another property, you will still pay taxes on the gains you made in selling your house. The bottom line: don’t look at your house as a financial safety net. Don’t buy a house until you have your savings safety net and other low-risk investments in place.

Trap 5: Federal Programs Make It Safe to Buy a House with a Very Low Down Payment

The Federal Housing Administration (FHA), Veterans’ Administration (VA), and U.S. Department of Agriculture (USDA) offer instruments that make it easier for people with moderate incomes or job-loss issues to get a mortgage with small or even no down payments on the home. The FHA, for example, insures mortgages backed by down payments as low as 3.5 percent, so you might think that buying a house with a low down payment is relatively safe. You will have more of your own cash liquid for your use. Yes, you can leverage the small down payment for big gains in home value down the road, but until years pass, you will be carrying roughly $96.50 of mortgage debt for every $3.50 of home equity. When you borrow most of the cost of the house, you have almost no equity.

According to Joseph Gyuorko, chairman of the real estate department and the director of the Zell/Lurie Real Estate Center at the University of Pennsylvania’s Wharton School:

The less equity you have in your home, the greater the chance that a fall in prices will leave you owing more than the house is worth. Negative equity sometimes leads to mortgage defaults, and when buyers default, they lose not just their down payments but also closing costs and the value of any improvements they’ve made to their homes. Even if buyers don’t default, they may not be able to afford to move, because they have to pay off their old home loans to get new ones.²⁶

Even with a small down payment, there are many other costs that you must be aware of when pursuing homeownership, such as closing costs, real estate taxes, fees, and moving costs, that add 2 to 5 percent to the home’s total purchase price.

Additionally, these federal programs may not last forever in their current form. These initiatives make it easier for more people to go into debt, which is a huge threat to our well-being individually and as a nation. Should another economic crisis occur, all this debt could crash the FHA and potentially the VA insurance programs. In 2012, the FHA nearly went bankrupt. It has increased its reserves since then, but every financial crisis in our history teaches us not to regard federal involvement in the mortgage market as worry free. Why not simply save more over time and buy a house when you can truly afford it? That’s the kind of commonsense that is all too rare in the personal finance debate.

Trap 6: You Can Pass Your Home on to Your Children

I admire the generosity and integrity of parents who have this in mind when they get a mortgage. But this simply isn’t a reason to buy a home. Why? It is a fool’s errand to predict the future behavior of people, even those you love. “While physics and mathematics may tell us how the universe began, they are not much use in predicting human behavior because there are far too many equations to solve,” remarked the late genius physicist and author Stephen Hawking in an interview for his book The Grand Design.

Here are some nasty ways your best-laid plans could have unexpected consequences:

   If your adult child is married, he or she could lose the house in a divorce. You could end up being unwelcome in the house you once owned.

   Your adult child could owe gift taxes.

   Your adult child could lose his or her job or sustain a loss in income and encounter the same money challenges I’ve written about in this chapter.

The Great Recession revealed an uncomfortable but important truth: we can’t necessarily trust the institutions—the Fed, the mortgage lenders, and the financial moguls—that we had depended on to guide us. Mastering money means learning to think more independently, to reject harmful narratives, and to act in your own financial best interest. A home can be all the things you want it to be: sanctuary, safety net, and an investment for the future. Like anything really worth having, though, you’ll only achieve this through smart, sound planning.