One of the things that’s really bothered me about the media coverage of the foreclosure crisis has been the constant overlooking of one simple fact: Homeowners who bought with little or nothing down do not own anything. They are borrowers, plain and simple.

Too many of these stories focus on this notion that the house in foreclosure is worth less than the mortgage the borrower took out for purchase. But that’s not the reason a house goes into foreclosure. A house goes into foreclosure because the borrower can no longer pay the mortgage, and this is generally caused by one of a few scenarios:

A.    They or their spouse unexpectedly lost their job and cannot find a suitable replacement.
B.    They or their spouse or another family member has fallen ill, causing unexpected medical expenses to rise, which has a significant impact on their household budget.
C.    The teaser rate on their mortgage has increased and the owner can no longer afford the monthly payment. (In theory, this should come as no surprise to a borrower who signed up for this type of loan. They signed a mountain of paperwork saying that they understood the terms of their loan, which should have stated this pretty clearly.)
D.    They bought with a teaser rate thinking they would refinance into a fixed-rate before the initial rate increased – only to find that when that time came, they did not qualify for refinancing due to changes in the market and other factors. This was a risk that they should’ve understood when making the purchase. Unfortunately, the risk turned out to be too much for them.

Again, none of these scenarios mentions anything about a borrower going into foreclosure because their house value has decreased. I wish more people understood this.

Reading through Warren Buffet’s annual letter to shareholders this morning, I was pleased to see him bring this come up in his discussion of the companies financial holdings:

“Commentary about the current housing crisis often ignores the crucial fact that most foreclosures do not occur because a house is worth less than its mortgage (so-called “upside-down” loans),” Buffet writes. “Rather, foreclosures take place because borrowers can’t pay the monthly payment that they agreed to pay. Homeowners who have made a meaningful down-payment – derived from savings and not from other borrowing –seldom walk away from a primary residence simply because its value today is less than the mortgage. Instead, they walk when they can’t make the monthly payments.”

This explains why I am disappointed with the high-level discussions about the importance of keeping homeowners in their homes (using taxpayer money!). Sure, it’s important to help people who’ve been affected by the recession in ways no one could’ve predicted. But I think it’s ridiculous to tell home buyers who bought with zero risk on themselves that we’re going to help them for the good of the country. To me, that’s bogus. And whatever plan the Obama administration adopts needs to really think through the repercussions of showing that so-called lesson to all of America – that it’s OK to take a huge risk with your personal finances, that no matter the price of a house, every American deserves to have one whether they can feasibly afford it or not. These are not lessons that will improve our economy in the long run.

Once again, I have to agree with the venerable Buffet when he says:

“The present housing debacle should teach home buyers, lenders, brokers and government some simple lessons that will ensure stability in the future. Home purchases should involve an honest-to-God down payment of at least 10% and monthly payments that can be comfortably handled by the borrower’s income. That income should be carefully verified…. Putting people into homes, though a desirable goal, shouldn’t be our country’s primary objective. Keeping them in their homes should be the ambition.”