We bought our home four years ago in 2006. It is a modest, three bedroom house in a quiet neighborhood in Villa Rica, a small town to the west of Atlanta. The town was rapidly growing and had recently added a super Wal-Mart and a Home Depot. A Chick-fil-A opened shortly after we moved in.
Realtors and mortgage loan officers offered interest only loans to us. They said that we could use this type of loan to buy a bigger house, then refinance in a couple of years when the value of the home had gone up. Instead, we chose to take the responsible path and buy a smaller home financed with a 30-year, fixed rate mortgage. Our plan was to buy the house, live there a few years, then sell it at a profit to finance a larger, more permanent home.
Our plans were shattered by the mortgage meltdown of 2008. Overnight, the value of our home crashed. We had no idea by how much because no homes were selling to compare it to. Of the five houses, closest to ours (one on each side and three across the street), three went through foreclosure over the next two years. Two are still vacant.
Many of the problem mortgages came from people who, when faced with the choice we were offered, opted for the interest only loan. These loans, part of a category called subprime mortgages, were failing droves. It was basically a case of people taking out loans that they could not repay to buy houses that they could not afford. Government corporations like Fannie Mae and Freddie Mac provided a market for these loans and encouraged them through laws like the Community Reinvestment Act.
When the economy hiccupped and the value of their houses started to decline, many simply walked away from their loans. Others took pay cuts or lost their jobs as the economy worsened. Eventually, many of these homes also went into foreclosure. The value of my home kept falling.
Congress’ answer to the crisis was the Troubled Asset Relief Program. Money was originally appropriated with the purpose of buying these “toxic securities” from banks. This would aid in interbank lending and help to thaw the frozen credit markets. Instead, the money was used to buy stock in banks. Toxic securities stayed on the banks’ balance sheets and the value of my home kept falling.
Next, Congress passed President Obama’s stimulus package and the President unveiled a mortgage modification program. The stimulus was meant to create demand in the economy and the mortgage modifications were meant to change the terms of mortgages to help people make their payments. Neither has made much difference in the economy. Unemployment today is higher than when Obama took office (as well as higher than under President Bush and higher than Obama said it would go if the stimulus passed). Fannie Mae and Freddie Mac still have not been reformed in spite of sweeping new regulations for Wall Street. Unemployment is still up and the value of my house is still down.
The situation today is reminiscent of the early days of the Great Depression, when rampant government spending, increased regulation, and higher taxes combined to keep the US economy stagnant for a decade. This year millions of Americans will be voting to change direction and keep us from repeating history. Where spending trillions of dollars has failed, it is now time to try cutting government budgets, business friendly policies, and slashing taxes.
Two years into this Great Recession, the value of my house is still about 40% less than what I paid for it. It will be years before we can hope to sell and move to a larger home, but because I still have a job, a home and a family I can consider myself one of the lucky ones.