4um: Americans Using Home Equity Loans to Finance an Array of Purchases

Title: Americans Using Home Equity Loans to Finance an Array of Purchases
Source: Chicago Tribune
URL Source: [None]
Published: Aug 25, 2002
Author: Janet Kidd Stewart
Post Date: 2008-03-22 09:34:00 by Jethro Tull
Keywords: None
Views: 165
Comments: 6

Americans Using Home Equity Loans to Finance an Array of Purchases.

Byline: Janet Kidd Stewart

Aug. 25--Bogged down by more than $20,000 in credit card debt, Geraldine Maratea's ears perked up when co-workers chatted about consolidating their debts into lower interest home equity loans.

The 53-year-old school principal had built up nearly $60,000 in equity over the eight years she's owned her Bridgeport home, and an insurance estimate showed her brick two-story had soared in value from $157,000 at the time of purchase to $250,000, a far better return than her stock investments have given her.

After a quick on-line search of loan providers, Maratea picked up a fixed-rate home equity loan of $40,000, equal to her original down payment and enough to pay off the debts with a cushion left over for some new decorating plans.

"My monthly bill is now about $100 less than all the credit cards, and it will all be paid off in five years," said Maratea. "Plus, I can take the interest off my taxes."

With their stock investments plunging and interest rates at historic lows, Americans are turning their homes into ATMs, tapping their equity to fund everything from pizza deliveries to fancy new kitchens.

Money tied up in home equity loans, lines of credit and second mortgages has more than doubled in the last decade to a stunning $307 billion, according to the Federal Deposit Insurance Corp.

And with interest rates continuing to fall -- recently hitting lows not seen since the late 1960s -- still others are refinancing and taking a big chunk of cash out of their homes.

Evanston real estate agent Susan Kipley did just that last August, refinancing an Oak Park two-flat at 6.25 percent on a 30-year loan and taking out cash to remodel both units.

Kipley is confident the local housing market is still strong, and she still has a third of the property's value in equity. As a real estate agent, she still sees plenty of buyers out there wanting to trade up.

"People seem to be buying as much as they can buy, and money is awfully easy to get these days," she said.

Indeed. Warnings about a housing bubble be damned, homeowners are literally betting the farm.

Wendy Posnock this summer took out a line of credit on her first home to buy a four-unit building as an investment, netting a rate that stays a quarter point below the prime rate for the life of the loan.

"I was looking for some diversity in my cash flow, and I thought a four-tenant building would be easier to fill than a single [luxury] home," said the Oak Park resident.

After taking some big losses in the stock market this year, Posnock is more comfortable with real estate.

"Particularly so far in 2002, investors have chosen to put their dollars into homes rather than a faltering equity market," economist Gina Martin of Wachovia Securities noted in an Aug. 16 client letter.

Financial institutions, eager to keep the housing machine humming, are aggressively marketing products aimed at tapping home equity, knowing that it has been the American consumer propping up the economy in recent years as business investment flagged.

"Lines of credit that can be taken out and drawn down as needed are very popular today because they're tied to the prime rate," which has stayed low, said Brad Conner, manager of retail real estate lending for Bank One Corp. "It's very much a core product offering and we do quite a bit of marketing."

The bank offers a slew of promotions on its variable lines of credit, from $40 Target store gift cards to flexible lines that can be broken down into fixed rates for specific purchases.

Another big mortgage lender, Charter One, waives some fees for people refinancing their loans or taking first mortgages if they take a home equity line at the same time -- even if they don't need the money.

"The bank's mentality has changed. We've adopted a more aggressive sales culture," said Jeff Marshall, consumer loan sales manager in Illinois for Charter One. The bank has weekly call nights at its offices, where branches stay open late and loan specialists ring up previous customers to offer promotions on new loans.

The bank issues home equity line customers a card, much like an ATM card, instead of checks, emphasizing the ease of use.

"It looks like a credit or debit card and you can have it with you all the time," he said. Marshall himself whipped out such a card on a trip with his wife after she found a pricey ring.

Nationwide, underwriting has become more aggressive, according to a recent report from the American Bankers Association. The trade group said the maximum debt-to-income ratio surged more than 12 percentage points in the last two years. That ratio is the percentage of a borrow's income that is used to pay debt. Lenders will not approve a loan if the borrower's ratio of debt to income is too high. But they're making loans whose debt-to-income ratio is nearly 50 percent.

Also, more banks are expanding into high loan-to-value lending.

Charter One, among many others, offers loans for up to 90 percent of customers' equity. Some offer 125 percent, based on rising property values.

All that worries consumer groups and debt counselors.

"Once you take that loan, there's no going back. Your home is at risk," said Tiff Worley, president of Auriton Solutions, a non-profit debt counseling agency in Roseville, Minn. "If those funds are the only way you can keep up the mortgage, you should talk to a certified adviser before taking that step. On the surface it looks attractive but it's one more step to potentially losing your house."

The Consumer Federation of America has also issued stern warnings to homeowners about stretching themselves too thin.

"Using home equity to pay for consumption -- as opposed to investment -- is very dangerous," the association warns in a list of tips for refinancing. "Remember: Unsecured credit card debt does not put your home at risk, but an unaffordable mortgage does. If you cannot afford your credit card payments, reassess your spending habits."

The consumer federation notes that homeownership has increased precisely because banks have eased credit requirements, but that some consumers are dangerously close to their limit. The group urged people not to borrow more than 80 percent of their home equity.

"It could be a tremendous problem," said the consumer federation's legislative director, Travis Plunkett. "If somebody is leveraging their home -- their biggest asset -- it's their savings and a major tool for building wealth and retirement security. If they are leveraging the home for an investment that will pay off, like home improvement or education or a new business, that can be a positive tool if done carefully. But above a certain point it gets to be dangerous."

Maratea still feels comfortable with her decision to take the equity loan to pay off credit cards. She traded a double-digit credit card interest rate for a fixed 8.25 percent rate on her Bank One home equity loan.

Even though she probably could have found a lower rate with more shopping, she felt comfortable with Bank One's history (several family members worked for the predecessor First National Bank of Chicago) and with the ease of using the bank's Web site for the loan application process.

Plus, job stability and her ability to pay the monthly bills isn't much of an issue. A lifelong Bridgeport resident, she's worked at the same Catholic school for 32 years. She plans to stay in the home at least until retirement, so there's also little chance she'll move and face early termination costs.

"I'm committed to this community," she said, recalling a childhood filled with lots of celebrations with family and friends. "It's one of the last real neighborhoods, and people value their property. People my age are inheriting property here that has soared in value. There are 25-foot lots going for $100,000."

And the consumer groups' warnings may ring truer for states like Texas and Florida that offer big homestead exemptions from bankruptcy court. In Illinois, just $7,500 can be sheltered in a bankruptcy anyway, so credit card debt can cause just as many problems for homeowners.

"There's clearly been a preference for the flexibility of home equity lines and the alarm bells [about customers' ability to handle the debt] are not going off," said Fritz Elmendorf, spokesman for the Community Bankers Association, an industry group.

In its 2001 home equity study, the association found that equity line foreclosures as a percentage of total portfolio dollars doubled last year, but still represented less than half of 1 percent.

The key, say loan experts and veteran borrowers alike, is to have a financial backup plan to avoid catastrophe.

Posnock, the landlord-to-be, has a cash cushion that would allow her to pay off her variable-interest equity line if rates start moving up fast, for example.

Most important, use the lower rates to improve your debt situation -- not worsen it.

Lake View condo owner Jodi Rosen Wine and her husband Chris Wine used a home equity line for a big down payment on an Oak Park home earlier this year.

They recently sold the condo, and will soon pay off the equity line with the proceeds from the sale. Once that is paid off, they'll have more than 50 percent of the new home's value in equity. The game plan: owning the house free and clear by the time their kids, ages 3 and 1, graduate from high school. Once again, the low rates make it possible. They locked into a 15-year mortgage at just 6 percent.

"You can pretty much borrow any amount you want if you have good credit," said Wine, an attorney. "But people can end up doing some crazy things, like financing a car over 30 years. We're using the rates to lower our debts, not raise them."

To see more of the Chicago Tribune, or to subscribe to the newspaper, go to http://www.chicago.tribune.com/

TICKER SYMBOL(S): WB, ONE, CF

The article I posted is a few years old, but adds to what Kamala posted (above). Two years ago, more than 30% of all new car sales were purchased with home equity loans. Now, with home equity vanishing, cars and other durables are hurting. Iceberg ahead. (1 image)

Capt. Bernanke has already hit the iceberg and is now ordering the deck chairs to be rearranged.

Maestro Paulson, who has recently composed a new arrangement of an old standard, has just struck up "Nearer My God to Thee."

“I would give no thought of what the world might say of me, if I could only transmit to posterity the reputation of an honest man.” - Sam Houston

with the decline in housing only a third of the way wound down, may be able to pick up some nice wooded land for a reasonable price then.

they'll be lucky to get $200 when we bottom, and they should be grateful for that.

Many believe in either intelligent design or evolution...but I am opting for unintelligent design, where god is a retarded kid who likes setting army men on fire and leaving his toys out in the rain.

Cash flow? Snicker. Four tenants easier than one? Riiiight. Sounds like money laundering. Seriously, if there's any money in renting out a building just "bought" (double-leveraged) using an equity loan, it must be from being a slumlord, a pimplord, or some other wonderful application.

Maybe we can re-inhabit our once great cities after the Latino locust are done devouring anything of substance.

Mortgage interest deductions are a government subsidy for the bankers (FRAUD) and builders that has grown to include every credit issuing company on earth. Many states, such as California, are 2nd Mortgage based economic financial disasters that depend upon false equity and inflated appraisals waiting for an opportune moment to collapse.

As long as we accept fraud on a wholesale basis ... we get what we deserve ... more fraud.

And the men who loan money to governments, so called, for the purpose of enabling the latter to rob, enslave, and murder their people, are among the greatest villains that the world has ever seen. And they as much deserve to be hunted and killed (if they cannot otherwise be got rid of) as any slave traders, robbers, or pirates that ever lived. ... Lysander Spooner

President Bush is determined to end the prejudice against people who want to buy a home but don’t have any money. Since he became president the U.S. Department of Housing and Urban Development has spent more than $120 billion. HUD public-housing projects continue to devastate poor neighborhoods. HUD largesse to local governments continues to finance the confiscation and demolition of private homes, and HUD programs continue to spur fraud and corruption around the nation.

Bush has done almost nothing to reduce HUD’s damage to America. Instead, he is devoting himself to expanding home giveaways. He proclaimed on June 16, 2003,

Homeownership is more than just a symbol of the American dream; it is an important part of our way of life. Core American values of individuality, thrift, responsibility, and self-reliance are embodied in homeownership. In Bush’s eyes, self-reliance is so wonderful that the government should subsidize it.

Bush could be exposing taxpayers to tens of billions of dollars of losses, luring thousands of low- and moderate-income people to the heartbreak of losing their first house, and risking wrecking entire neighborhoods. Bush’s housing initiatives – especially his “American Dream Down Payment Act” to give free down payments to selected home buyers – were key planks in his reelection campaign. He is also pushing Congress to enact a law to permit the feds to give zero-down-payment mortgages.

The Bush “Dream Act” and the zero-down-payment plan are modeled after “down- payment assistance programs” that have proliferated in recent years. These programs, often engineered by nonprofit groups, routinely involve a home builder giving a “gift” to the nonprofit, which provides a home buyer with money for the down payment. The price of the house is sometimes increased by the same amount as the builder’s “gift.” Almost all the mortgages created with down-payment assistance end up being underwritten or guaranteed by either the Federal Housing Administration (FHA) or Ginnie Mae (the Government National Mortgage Association).

Free down payments carry catastrophic risks. The default rate on mortgages from the largest down-payment-assistance organization, Nehemiah Corp., is 25 times higher than the nationwide mortgage-delinquency rate, according to the HUD inspector general. The default rate on Nehemiah mortgages quadrupled between 1999 and 2002, reaching almost 20 percent. The I.G. warned that permitting the Federal Housing Administration to insure mortgages made with gifts from down- payment organizations is “endangering the FHA insurance pool.” HUD currently has no idea how many of the loans that the FHA is underwriting are closed with down-payment gifts.

Bush began pushing his American Dream Down Payment plan in 2002. The administration’s rhetoric echoed the 1968 Housing Act, which nullified state and local restrictions on where blacks and other groups could live. A June 17, 2002, White House Fact Sheet declared that Bush’s agenda

will help tear down the barriers to homeownership that stand in the way of our nation’s African-American, Hispanic, and other minority families by providing down-payment assistance. The single biggest barrier to home-ownership is accumulating funds for a down payment. The Bush administration sounded as if requiring down payments is the new version of Jim Crow laws.

The Bush administration finally got its “Dream Act” pushed through Congress in the fall of 2003. The House leadership chose freshman congresswoman Katherine Harris (the Republican hero of the Florida 2000 recount) for the honor of sponsoring the bill. Harris declared,

As our nation continues to confront daunting threats both at home and abroad, we cannot neglect the most basic security of all, and that is a safe, clean, adequate place to live. One congressional staffer raised the question of whether “HUD will soon send out maids to ensure our right to a clean house.”

One of the biggest hurdles to homeownership is getting money ... so today I’m honored to be here to sign a law that will help many low-income buyers to overcome that hurdle, and to achieve an important part of the American Dream. He plaintively added,

The rate of homeownership amongst minorities is below 50 percent. And that’s not right, and this country needs to do something about it. Bush did not specify the precise percentage of blacks and Hispanics that would be “right.” The new law authorized federal handouts of $5,000 each for 40,000 home buyers whose incomes are less than 80 percent of a local area’s median.

The Bush administration and Republicans portray down-payment giveaways as if they were primarily targeted to minorities:

After Bush visited a black neighborhood in Atlanta in 2002 to hype his housing- aid proposal, his first HUD secretary, Mel Martinez, explained, “We sell it that way, as a program for minorities, because we want minority buyers for these homes, but it’s available to anyone” who qualifies under income guidelines. When the House passed the American Dream Down Payment Act on October 1, 2003, House Speaker Dennis Hastert hailed the bill: “We will help lift up our African- American and Hispanic communities.” HUD secretary Alfonso Jackson declared in February 2004 that the Bush administration efforts “will help more Americans, particularly minorities, achieve that dream” of homeownership. If the down-payment program actually specifically targeted minorities, it would violate numerous federal laws and the U.S. Constitution. The “right” of homeownership

Bush talks as if people should be able to buy a house the same way they buy a couch at some dubious no-money-down furniture store. In a January 23, 2004, speech to the U.S. Conference of Mayors, he declared,

I’m asking Congress for $200 million to help people with their down payment.... Many citizens have the desire to own a home, but they don’t have the dough to make the down payment. And therefore, they balk at making the decision. But to portray this as a “balk” makes as little sense as criticizing the average wage earner for not purchasing a yacht.

Once Bush proclaims a national goal, he entitles himself to claim credit for the efforts of all Americans. At an October 15, 2003, talk at Ruiz Foods (the nation’s largest producer of frozen Mexican food) in Dinuba, California, Bush reminded listeners of his devotion to boosting homeownership: “And so I let out a goal. I said over the next decade, we want there to be 5.5 million new minority homeowners.” Then Bush informed his listeners of what he’d helped to achieve: “Last year, we did a pretty good job. There’s now 809,000 new minority homeowners in America.”

Bush took credit for every black and Hispanic person who bought a home during his administration – even though the vast majority received no help from him. Bush exalts in the recent rise in the number of Americans who own homes as one of his greatest accomplishments:

It turns out that one of the fantastic statistics and one of the realities of our society today is more people own homes than ever before. The percentage of Americans who own homes rose from 66.2 percent in 2001 to 68.6 percent in late 2003. But the foreclosure rate is rising much faster than the homeownership rate. The foreclosure rate for home mortgages has tripled since the early 1980s. The rate has especially “gone up a lot ... in struggling neighborhoods in big cities,” according to Federal Reserve Board governor Edward Gramlich.

A month after signing the “Dream Act,” Bush urged Congress to permit the FHA to begin making zero-down-payment loans to low-income Americans. The administration forecast that such mortgages could be given to 150,000 home buyers in the first year. Secretary Jackson declared,

Offering FHA mortgages with no down payment will unlock the door to homeownership for hundreds of thousands of American families, particularly minorities. Federal Housing Commissioner John Weicher said in January 2004 that “the White House doesn’t think those who can afford the monthly payment but have been unable to save for a down payment should be deprived from owning a home,” National Mortgage News reported. While zero-down-payment mortgages have long been considered profoundly unsafe (especially for borrowers with dubious credit history), Weicher confidently asserted, “We do not anticipate any costs to taxpayers.”

The Bush administration aims to make more dubious mortgages, even though the percentage of FHA single-family home loans that have defaulted rose 54 percent between 1999 and 2002, reaching 4.25 percent. Roughly 12 percent of all FHA mortgages are past due.

Avoiding making unsound mortgages seems to be the last item on HUD’s list of priorities. Weicher declared in January 2004, “We have been addressing our default rate, and we are now able to help half the families who go into default avoid foreclosure.” This merely suppresses the evidence of a failed policy and sticks taxpayers with a larger bill once the roof finally falls in.

The FHA continues wreaking devastation in some neighborhoods and cities across the country. A 2002 study by the National Training and Information Center, a Chicago nonprofit organization, found that between 1996 and 2000 21 percent of FHA loans in low-income areas in Baltimore defaulted and 25 percent of FHA loans in low-income areas in Queens, New York, defaulted. Eight of the 22 cities studied had default rates above 12 percent. The FHA paid out more than $5 billion in settlements on defaulted mortgages in 2001. More than 45,000 FHA homes were abandoned and vacant.

Homeownership carries far more financial rude surprises (such as the cost of major repairs) than does renting. If people get into a house they cannot financially handle and go bankrupt, they are much worse off than if they had never received down-payment assistance. Giving people a handout that leads them to financial ruin – as the Small Business Administration perennially does for people unfit to be small business owners – is wrecking-ball benevolence. The virtues of homeownership do not arise from living in a single-family dwelling and holding a piece of paper from a bank. Rep. Ron Paul (R–Tex.) commented,

In the original version of the American dream, individuals earned the money to purchase a house through their own efforts, oftentimes sacrificing other goods to save for their first down payment.... That old American dream has been replaced by a new dream of having the federal government force your fellow citizens to hand you the money for a down payment. Bush’s freebie hype could make the millions of low- and moderate-income Americans who are saving and scrimping for a down payment feel like fools. Bush talks as if the federal government is obliged to relieve all Americans from the nuisance of ever having to accumulate any personal savings.

Down-payment handouts and zero-down-payments are a great political strategy for Bush. He gets the applause and the political credit now, and the defaults from the program may not surge until much later. He transfers the risk of homeownership from buyers to taxpayers and then pretends he has multiplied virtue in America. He preens as a great benefactor at the same time he undermines those virtues that he is claiming to multiply.

In the early 1930s, shanty-towns of destitute unemployed people were known as Hoovervilles. In the coming years, if neighborhood after neighborhood is wrecked by waves of defaults and foreclosures caused by the reckless new mortgage policies, the areas should be known as “Bush blights.”

James Bovard [send him mail] is the author of The Bush Betrayal and Terrorism & Tyranny: Trampling Freedom, Justice, and Peace to Rid the World of Evil serves as a policy advisor for The Future of Freedom Foundation.

If America is destroyed, it may be by Americans who salute the flag, sing the national anthem, march in patriotic parades, cheer Fourth of July speakers - normally good Americans who fail to comprehend what is required to keep our country strong and free - Americans who have been lulled into a false security (April 1968).---Ezra Taft Benson, US Secretary of Agriculture 1953-1961 under Eisenhower