‘Digging A Deeper Hole’ With HELOC’s
CNN Money has this report on home equity loans. “During the past few years, millions of Americans fell in love with home equity lines of credit. These ‘helocs’ are easy and inexpensive to obtain and they carried very low interest rates, until recently. But what was a bargain two years ago can be a burden today.”
“Consider: The monthly interest payment on a loan of, say, $50,000, has more than doubled in two years, to more than $333.”
“The ease of obtaining a Heloc makes them very tempting. ‘It means mostly just walking down to the bank and asking for one,’ says Keith Gumbinger, vice president at a publisher of consumer loan information. ‘Many people are using it for day-to-day expenses. For them, the danger is they’ve been given a new tool, for digging themselves a deeper hole.’”
“In some high-priced housing markets, according to Ted Gross, a director of the National Association of Mortgage Brokers, people used Helocs to afford pricey homes. ‘A lot of people took out Helocs because it’s the only way banks would allow them to purchase with less than 20 percent down,’ says Ellen Bitton, CEO of Park Avenue Mortgage Group.”
“She explains that some banks would extend a conventional mortgage loan for only 80 percent of the purchase price. Borrowers had to come up with the rest as cash downpayments. The bank would extend a Heloc, which was backed by the equity of the home, for all or a portion of that downpayment.”
“Many people who bought property a few years ago thought, ‘Rates are so low, I’ll just [buy it with] a Heloc.’ Now they’re going to pay for it,’ Britton said.”
“Even though the cost of having a Heloc has soared, their popularity hasn’t declined. According to the FDIC, the dollar volume of these loans hit $531 billion in March, the last figure available, up 28 percent form $416 billion in June 2004.”
“According to David Barr, a spokesman for FDIC, homeowners had turned away from refinancing their primary mortgages recently because of higher interest rates. ‘But they keep turning to Helocs to extract cash from the equity in their homes,’ he says.”
“If the value of their house declines sharply, borrowers could wind up owing more than the house is worth. If they have to sell, they would have to pony up cash.”
There was an article in the Sunday NYTimes, I believe, that addressed the surging phenomenon of non-working men in their 40s and 50s. In addition to making the point that these men, who choose not to work because any jobs that are available are “demeaning”, are not counted in our unemployment statistics (”lowest unemployment figures in a generation!!”), the story was also interesting because the two men profiled were each able to avoid having to work by tapping their rising home equity through HELOCs.
I was reading and just shaking my head. This housing collapse is going to hurt even more people than I had originally thought. What’s going to happen to these two guys when they suddenly realize that the housing ATM has run out of money?!
The bigger question is what happens to the U.S. when millions of its citizens are BK without any hope of paying off their loans? Do they get thrown to the street? At the same time, millions more are being laid off because of the slow down due to lack of spending? Then they BK. What are the options for the gov’t???? Just wondering if anyone had any ideas?
“What are the options for the government?”
Hmmm, let’s see. First, a gov’t that’s already running massive deficits and has built up a gargantuan public debt may have difficulties getting more bagholders to loan it more money. Second, local, State and Federal tax bases will shrink due to collapsing property values and massive unemployment. Third, there is a real prospect of social unrest — those millions of illegal aliens and urban poor (among others) will do what they have to do to eat and feed their families, could could mean off-the-charts crime.
So, to recap, the gov’t will be too cash-strapped to do much of anything. While the social parasites who form the voting base of the Democratic Party will be provided for by their masters (at the expense of the dwindling productive classes), the working and middle classes will be on their own — overtaxed, yet seeing no benefit to them and their communities.
those millions of illegal aliens and urban poor (among others) will do what they have to do to eat and feed their families, could could mean off-the-charts crime.
Sounds like you’re a red state kind of guy. Us in the high immigration states tend not to think that way: the illegals tend to take the bad jobs, and in times of unrest will either keep those jobs or go home. Very little chance of them turning to crime: the downside is so much higher (instant deportation.)
So, to recap, the gov’t will be too cash-strapped to do much of anything. While the social parasites who form the voting base of the Democratic Party will be provided for by their masters (at the expense of the dwindling productive classes), the working and middle classes will be on their own
Umm, last time I checked, the working and middle classes were the base of the Democratic party. Perhaps you had some other group in mind? Maybe suburban homeowners getting big handouts on the mortgage deduction? Montanans getting huge federal tax infusions from the blue states?
gorobei, I hate to break this to you, but there is no Santa. Yes, part of the working and middle class make up the Democratic Party, but the same percentage of the working and middle class are Republicans. The remainder of each party are specific groups. The balance of the Republican Party consists typically of the conservative, business owners, wealthy, professional types were the balance of the Democratic Party is Union, liberal arts, and everyone who wants a handout. The latter being what Mr. Schadenfreude was refering to. The dependant class doesn’t vote Republican. Without this dependant class voting for Democrats, the Dems could never win any election on the State or Federal level. The middle class splits thier vote. And please, lets not call them the “have nots”, if anything, they should be called the “will nots”. Yes, I know not everyone is like this, but the “will not” dependant class gets bigger every day. They simply “will not”; try hard enough, care enough, make good choices or any for that matter. When these dumb asses go BK and cry for help and want government to bail them out, they will get no simpathy from me. At some point, we have to acknowlege that they are adults and they need to be accountable for their choices. That’s the difference between blue and red America. I grew up in blue America and recently escaped to red America and I’m not looking back.
Gorobei
I live in CA, very close to a high concentration of illegal immigrants. What makes you so sure they won’t commit more crime? They already commit a lot of crime! If you don’t see that you are not seeing reality. And all the marches….with their demands. What makes you think they won’t DEMAND food and money to keep them going?
Also, I agree, a huge Democratic base are those who on welfare and food stamps. If they go, the Democratic base goes.
Why do libs fail to recognize the obvious?
gorobei, I hate to break this to you, but there is no Santa.
Thank you for the non-sequitor
Yes, part of the working and middle class make up the Democratic Party, but the same percentage of the working and middle class are Republicans.
Clearly untrue: perhaps you mean “approximately?”
The remainder of each party are specific groups. The balance of the Republican Party consists typically of the conservative, business owners, wealthy, professional types were the balance of the Democratic Party is Union, liberal arts, and everyone who wants a handout.
Ignoring your bad spelling and grammar, I fear you are mixing claimed facts (repulicans are wealthy) with claimed desires (democrats want handouts/) Are you saying only democrats want handouts? Are you saying only democrats get handouts (the last 6 years belie that.)
The latter being what Mr. Schadenfreude was refering to.
What latter?
The dependant class doesn’t vote Republican.
Explain what this “dependant class” is again, please. Red states get the most federal govt handouts - they vote republican.
The middle class splits thier vote. And please, lets not call them the “have nots”, if anything, they should be called the “will nots”.
Now you are just babbling.
Dammit! It’s “dependent” , not “dependant:. It’s “there” for a place and “their” for a collective possessive. (We sold at a loss…it’s their gain - for now).
“To” is what makes the infinitive form of the verb, as in, “I want to kill my broker”. “Too” demonstates how much extra you paid.
Your analysis is so bizarre and skewed. You talk about “the productive classes” that vote Republican vs. the “social parasites” that vote Democratic. First of all, you do realize that the only actual manufacturing jobs left in this country that actually produce wealth are working class jobs mostly staffed by people from the lower rungs of the wage scale. Those productive red staters usually work in the illusory “post-Industrial” worksphere so often touted.
I’d be interesting in knowing who these “dependents” are? The % of people who flat out don’t work in America is rather small, and probably consists far more of the two middle-class gentlemen described above than the urban poor. The % of people in the lower wage scales who vote or even keep up with politics is literally MINISCULE, so I dont really see how they form some kind of base for the Democrats. Seems like some self-delusion to justify your other viewpoints.
In regards to illegal aliens, marching in favor of amnesty is nowhere near the same thing as turning to violent crime. The majority of people in Mexico arent starving or in a deep economic depression, there just isnt the opportunity that exists here. If people had to choose between some depraved post-apocalyptic depressed America where they have to turn to violent crime for food versus being back home in Mexico where they at least have food, shelter and peace, you honestly think they’ll stay here. Keep drinking that kool-aid kids.
I don’t believe that the mortgage interest deduction (which I have personally benefited from, so this isn’t sour grapes!) does ANYTHING to make housing more affordable.
It’s unfair, stupid, and simple causes the price of housing to rise. If they got rid of it, house prices would simply drop and we’d all be better off.
And please don’t forget the curent Repub war de jour that our kids will pay for. That said I have found out that it is a good idea to not get into politics here. We should just agree to disagree and move on.
Well, guess who has been in charge for the last few years as the US staggers from one mindless disaster to the next?
Rethuglicans?
My own conversion from ultra-right wing to moderate came after a 6-month stint being unemployed. Everyone should try it; it’s quite a learning experience.
Unfortunately Sol Veritas, hard cold reality is usually what it takes to wake up from the ultra-right-wing nightmare. With most of the population living paycheck to paycheck, all it takes is for one little thing to go wrong in life for a person to be out on their ass.
I hope things are once again going your way.
The vast majority of people dont need to even be woken up, every day is a demonstration of where right-wing “economics” can lead America. The funny thing is some of the posters here are really delusional, its actually kind of sad. The idea that there are VAST populations of lazy “social parasites” doing nothing but living off welfare in the urban core, and some liberal “elite” that has Fine Arts degrees and does nothing productive but critique art all day or something. Wake up and smell the coffee. The working class votes Democratic, and form the vast majority of the country. The percentage of social parasites is small, and the percentage of them that vote is miniscule. The Republicans got us into this crediting mess!
Hey, I’m not thrilled with the current “spending like drunk’en sailors” Administration. The war has been handled poorly and we have and will pay dearly for it. Choices were made, not by the easy do nothing, because I might be wrong crowd. Bush stuck his neck out for what he thought was right and he probably is. Yes, he and the Administration have made a few mis-steps, but somebody had to do something. The critics on the left are hurting America. We are at war folks. Using dead brave Americans as political chips is sick and history will judge it so.
For those who are unaware of the dependent class, you need to widen your exposure. I grew up in upper middle class California and never saw much outside my sheltered suburban community. I think a lot of us are in that boat. Nothing wrong with that. Heck, we should all be so lucky. I have unfortunetly seen the Antelope Valley turn into East L.A. in the span of five short years. And its this darn housing bubble that is the primary reason for it. So Cal has gotten so unaffordable, that those with family imcomes under $150,000 were pushed to the inland areas. Many poor (and yes many of them dependent) took the oppotuinty to move to Lancaster and Palmdale to escape the crap in Los Angeles. The only thing was that the problems they were running from where sitting in the their back seats. No, not all obviously, but it only takes a small percentage.
Red America is the working class. If you make over $35 an hour (~$70K), you are not the working class. In California that may sound working class, but again, you need to open your mind to the America East of Interstate 15. All new manufacturing seems to be headed to the Southeast (right to work states). That’s whose making your Nissans and Toyotas. They vote Republican. Most of your aircraft companies produce their products in Texas, Geogia, Kansas, Missouri and Arizona. Yes friends, they vote Republican. Last election, G.W. carried the popular vote. Red states go Republican with large majorities. Several of the big blue states only have small majorites. Thanks to the electoral college (which I don’t have a problem with), the blue state candidate gets all of California’s ~53 votes. Trust me, San Diego and Orange county have lots of Republicans. My Point, the middle working class is in all parts of America, but on the whole, they vote Republican more often. Remember, Gore would have been President if he could have only won his own state of Tennessee or Clinton’s Arkansas. This ain’t Starbucks Country folks, these people are the working class. I’m talking $9-20 an hour working class. Tell you what, let’s do an experiment. If you are on some form of public assistance, you can’t vote. Now let’s see what happens in the next national election. Don’t want to try that Democrats? Didn’t think so. And please spare me the industrial military complex is just white collar welfare. That sort of position is devoid of any critical thinking and itellectually bankrupt. If this is you, you need to listen for the pop. That’s the sound you’ll make the first time your head comes out of your ass.
Using dead brave Americans as political chips is sick
Indeed it is. I saw GWB opening a port facility in Florida on CNBC this week, and he mentioned 9/11 within the first 30 seconds.
If you are on some form of public assistance, you can’t vote.
I’m not going to say it would have swung elections, but I think you would be surprised how many farmers, and seniors on Social Security pensions vote Republican.
‘Small Government Conservative Republican’ US farmers get bigger (mean) subsidies per farm than they do in the ’socialist’ EU.
Where should I start with a post like this one?
Not worth responding to.
In case you didn’t get the memo, your team has been in charge for most of the last decade. The vast majority of government handouts have been going to defense contractors, mega corporations, mega farms and mega churches, not to inner city welfare queens (Clinton and the Republicans in congress enacted pretty sweeping welfare reform in the 90s).
I know 3 people who collect checks from the government, all staunch Republicans. I’ve got an uncle with a bum knee and a diabetic neighbor, both on disability, both active members of the Republican party. Watch that broad brush.
The biggest parasites in modern society seem to be at the top of the food chain, not the bottom. Have the Republicans cut spending like they promised? No, they’ve raised it to record levels, but they have cut social welfare. So where is all the money going to? It’s going to the politician’s well-connected corporate and religious sponsors, not to Jose and Kwanisha. But keep rooting for your team, by all means. Your side can do no wrong, it’s always the other side’s fault. As long as this is how we play politics in America, our problems will continue to grow worse and worse.
Like many on this board, I have been enjoying the fact that the long-awaited “popping of this bubble” is taking place and residential real estate is edging back toward fundamentals. However, I expect the pain associated with this decline is something all Americans will wind up sharing. Ramped crime, skyrocketing interest rates, and a severe recession are almost a certain byproducts of this event.
We live in a country willing to trample one another over valueless non-essential items in short supply, such as a Cabbage Patch doll or a Bennie Baby, one wonders what the future holds for our country once goods deemed necessary are difficult to obtain, after all, we have all been raised to be consumers. It is my prediction that those who have lived “the good life” for such a long period would easily be prompted to commit crimes in the name of survival and would not hesitate to put themselves at risk in order to obtain necessary goods.
Many people in Northern America will only allow their lifestyle to be lowered by a certain amount before resorting to drastic action to rectify it; in many cases, this may mean committing crime in the name of survival. This is true for any country; however, America has enjoyed such a high standard of living over the years that our breaking point could theoretically be much lower than that of other countries. For many, this point could come with the inability to afford entertainment or certain luxury items.
Unfortunately, crime is the least of my worries these days. I am much more concerned about what I believe an abundance of problems being inherited by this country simultaneously. For those familiar with the phrase “Peak Oil”, I think it important to highlight the fact that this catastrophic event would seem to be aligning itself with the housing bubble. When one considers the magnitude of the coming real estate crash combined with the biggest problem faced in the history of man (peak oil); it is safe to say that these next 10 years are going to be very interesting.
they’ll probably just go back to work and rent a room
Maybe get “demeaning” jobs.
I feel demeaned at my job every day. It’s called being an American. But it feels good to know that you can take care of yourself and your obligations. That is never demeaning.
Call it Spoiled Boomer Syndrome (SBS). A generation that –with few exceptions– (a) has never had to work hard for anything, (b) has never been told “no” by parents, government, employers, etc., and (c) feels entitled to perpetually enjoying “the good life” as a natural birthright.
Trying to explain to such people that sometimes we have to make sacrifices in life to get by is like explaining why eating too much candy is bad for you to a 2 year-old.
That article had a nasty tone that doesn’t tell the real story. If you lose your job when you are in your 40s, in some industries you can never get another real job. I know a number of people in their 40s who lost their jobs in the dot.com crash and then became real estate agents and brokers. These are smart, educated, people who could not get another job in their chosen field. Now they will be on the street again.
Totally agree. People here are missing the real story. Our living-wage jobs are disappearing. The men in this story **were** the productive workers. They lost those jobs, and are unable to find comparable work. This is going to spread, and all the self-righteous advocates of Darwinian capitalism may well find themselves in the same position.
Remember, the reason most civilized societies have some form of socialism is because there is no better way. These people will not quietly drift off so you can enjoy your spoils. Whenever you get these vast disparities in wealth, there exists the perfect environment for social unrest (read: very high crime and attempted revolutions). Society (and the wealthy) are best served when the majority of people feel secure about their future prospects. They need to know they have food, shelter, healthcare, and other basic necessities — and that tomorrow, they will have the same.
Anarchy is good for no one, IMHO, and that’s what you’ll get when you try to squeeze the last bit of resources out of the poor and middle classes.
Once again, we’re not talking about research scientists suddenly being forced into jobs as WalMart greeters here. We’re talking about able-bodied middle-aged men who REFUSE to accept slightly lower paying jobs even on a TEMPORARY basis because they believe such work to be “demeaning” and “underpaying”.
Oh, boo-hoo. Please spare me the tears the violins. When I finished my masters degree in ‘91 (marketing for the nosy), the economy was in full recession and out of a graduating class of a 55, only 3 had a job lined up. I was pretty much forced to either take near-minimum wage temp jobs or bum off my parents. I chose “demeaning” work. Did I like my choices? Hell no, but those were the cards I was dealt.
In life, you learn to play the hand you were given. Sometimes bad shit happens for reasons beyond your control. It’s not fair, but you learn to deal with it. Unless of course, you’re a typical Boomer. We have a whole generation of spoiled adult brats who have never learned to tighten their belts when times are tough and have never felt any negative consequences for living/spending beyond their means. The National Debt and national savings rate is a testament to this sad reality.
Unfortunately, a considerable amount of pain will need be felt by many in order to restore our economy and national psyche to sanity and sustainability. This transition will be difficult, but in the end will prove to be a blessing.
Once again, we’re not talking about research scientists suddenly being forced into jobs as WalMart greeters here.
———————–
HARM,
Do not discount this possibility. It is exactly what I’m talking about. They are already sending pathology and radiology tests overseas for diagnosis. Why not research scientists? With so many complaining about the cost of medicine, it’s very easy to see how this could happen.
You make my point for me. Outside of jobs which require face-to-face contact (plumbers, electricians, mechanics, nurses, etc.), nothing is exempt from the deflationary forces of globalization.
BTW, you were at the beginning of your career when you were willing to take more meaningful jobs. You also were likely not to have had a family to support. BIG DIFFERENCE from someone at the middle/end of their careers with family.
FWIW, I was there too. Single, college-educated during the last recession. I hardly noticed it (recession) because what I was making was better than the $3.35 I had been making at various jobs in college. I could also survive on Top Ramen and live on people’s couches or rent a room in a bad part of town. Not anymore.
meant “willing to take LESS meaningful jobs”
Also, the face-to-face jobs will still see lower wages (imported workers from poorer countries & greater supply of US workers willing to take those jobs). It’s just that those will be some of the only more stable jobs.
I’m slaughtering the English language here. Sorry!
“Call it Spoiled Boomer Syndrome (SBS)”
DId you think that up all by yourself? I’m amazed by your intellectual prowess! This ‘internets’ thing is great. All you have to do to back up this wonderful theory is to provide a thing called a ‘link’. I’ll be anxiously awaiting the citations.
“i” before “e” except after “c” weinerdog.
Or when pronounced “ay” as in neighbor or weigh
Yeah but “wiener” is a German word that means someone from Vienna. Can’t use English spelling rules.
OTOH “weiner” is someone who makes wine, so maybe “weinerdog” is really a winemaker’s dog.
Google exists:
Less than a 2 minute search turns up this discussion.
http://eschenck.typepad.com/ernie_schenck_calls_this_/2005/11/do_baby_boomers.html
http://www.brothersjudd.com/blog/archives/2004/09/having_survived_the_worst_gene_1.html
http://www.mediahistory.umn.edu/genx.html
etc, you get the picture, it isn’t an uncommon theme.
Wow, really struck a nerve with that post. Ok, where to start?
weinerdog43,
Have to admit I love TLAs (though not nearly as much as Robert Cote) and I do SO hope this one catches on! Thanks for noticing –and please keep using it as often as possible!
Ozarkian,
What struck me most about that NYT article was the astonishing tone of entitlement and childishness expressed by the able-bodied unemployed that were interviewed, particularly the refusal to accept a lower paying job (even temporarily) because it’s perceived to be “demeaning” and “underpaying”.
Yes, I’m well aware that being unemployed in a lousy job market sucks, and it’s especially hard on those who have a college degree (or degress) and higher aspirations. I’ve been there. Most of my generation (X) has been there and has learned to downsize our expectations very quickly. Even so, getting laid off in a crummy market is hardly the equivalent of the Bataan Death March or having to stand in bread lines to survive. Market cycles suck, most of us go through bad periods, life isn’t fair, etc. Most of us learn to adapt and roll with the punches… just not that many from a certain born-lucky generation who by and large tend to exhibit a distinctively smug, whiny sense of “me-me-me!” entitlement.
I know there are a lot of nice, decent Boomers out there with more traditional values, a strong work ethic and a generous nature (you may be one of them). Unfortunately, based on my (albeit not statistically valid) experiences, such “good Boomers” tend to be in the minority. The majority tend to display, well, somewhat less than socially redeeming characteristics. Take a look at our current leadership and the “perp walk” roster of rogue CEOs for some fine examples of the very flower of Boomerhood.
There was an article in the Sunday NYTimes, I believe, that addressed the surging phenomenon of non-working men in their 40s and 50s.
I’ve begun to notice more local news articles and obits of the suicides of men predominantly in their early 50’s.
Taxed to death, dumped by their wives of 30 years, and downsized out of their jobs. Most are physical wrecks.
No place for them in this totally f*cked up culture.
Might just as well take the bullet.
Talk about augering-in.
The new American paradigm.
Hehehe…if anybody wonderss how the next generation is gonna
fare, I hope they took a good look at those 2 POS kids from NJ on Swapping Wifes last night on ABC..If these whiney, indulged sniveling shits are the one who are gonna be payin’ my SS & Medicaid, this country ain’t got a chance, LMFAO…
Leave a revolver and a bullet on the doorstep. Many will take the hint.
mrjauk, good post - I read the NYT article and was appalled at the entitlement, the hubris, and the financial stupidity of those men.
They are not only FB’s, they’re going to be FR’s - f*cked retirees - they’d be infinitely better off taking a lower-paying job now and maintaining their equity and retirement savings, instead of robbing their own future and being forced to take worse jobs in retirement years. They’ll be cleaning toilets in their 80’s - we’ll see how proud they are then. They deserve everything that’s coming to them.
Wow ~ this thread makes me proud to be non-party affiliated.
As for the lazy men living off their helocs, that’s certainly their right. But I better not hear stories of them being bailed out with taxpayer money when their well runs dry.
I have a question about helocs - are they fixed rate? adjustable? or, like a mortgage, either depending on how a person sets it up?
Most HELOCs are adjustable rates, at least what I’ve seen. That was part of the fdraw: The interest rate until recently was very attractive. Unfortunately, now it is not, and those who borrowed in low-interest times are paying the piper now. Friend if mine, for example, is over 10% now on his HELOC (he started at a low teaser rate back in 2003 or thereabouts), but fortunately, he’s paying it down fast as heck!
“If the value of their house declines sharply, borrowers could wind up owing more than the house is worth. If they have to sell, they would have to pony up cash.”
Right! Like they could “pony up” the cash! They DO NOT have any cash for heaven sakes. I’ve watched people charge chewing gum, and drive off in a Benz, and don’t tell me they pay off their cards in full every month!
Meant to say ” don’t tell me they ALL pay off their credit cards every month”
Today, I was sitting inside a Starbuck’s (there’s no Peet’s here!) and within 15 minutes I watched 8 people CHARGE their coffee…I know this, cause I could hear the clerk ask, debit or credit.
Amazing.
I charge everything on my credit card, even coffee (though I don’t buy it often these days — too much of a waste of money).
I pay my credit card off in full once per week, every Wednesday. I get 1.5% cash back, and it’s easier to track these credit card purchases in Quicken, rather than trying to remember where cash went and exactly how much it was and save all the receipts.
Maybe I’m the exception to the rule but, still judge not! . . .or at least don’t judge without sufficient information. . .
Merchants hate people like you. Most have to remit 2-3% back on credit card purchases. Plus I can’t count the number of times I’ve had to stand behind some cow (it seems like 95% of people who use plastic for purchases under $10 are females) and wait for her to work through declined credit cards or a balky credit card machine.
misogynist?
not all females are cows, just the morbidly obese….
A better descriptor word in your example could have been “bimbo”, “simpleton” or something like that
I know it is not nice, but the cow comment caught me off guard and gave me a good laugh. A little off thread, but I have noticed a massive surge in the aforementioned bovine population… an unpleasant reality in our country and undoubtedly encouraged by the advent of those wonderful motorized scooters which shuttle their lard asses about.
With all respect, I think that you’re wrong that merchants hate credit card users. Many establishments (for example, McD’s) have found that paying by credit card can be quicker than paying by cash (counting the change, etc., can take time). This has been helped by the relaxed requirement of no signature for certain small purchases.
Also, the 2-3% fees to the merchant are a small price to pay to avoid having a lot of cash around. Employee cash theft is a (if not the) leading cause of loss to many businesses.
Reducing the amount of cash on hand reduces this risk of theft. Second, reduced cash on hand also reduces risk of robbery by an external person, as well as the transaction costs associated with making bank deposits/withdrawals . Third, more credit transactions reduce the amount of time needed to settle/balance a register at a store closing and/or shift change. This is important for many businesses (like gas stations and Starbucks) that have many part-time employees and where shift changes occur in the middle of the day, while the business still needs to be open. Fourth, credit transactions allows some merchants to collect some demographic data on customers (ZIP code, etc.) without having to require a customer to enroll in some type of club program (like the ones many grocery stores use).
I realize there is an antitrust case against Visa et al, and that the transaction fees are likely a bit high for merchants. But to say that many or most merchants prefer cash to credit transactions is, in my view, incorrect.
I would rather be behind someone paying via credit card then someone who takes 10 minutes to write out a check.
Bravo!! I was going to add the same thing. Just wait behind these dolts that still use checks and you’ll love anyone using a credit or debit card. Why haven’t they banned this antiquated form of payment yet? And it’s worse when I see someone under 50 years old do it!!!
Please give us check writers a break. At least I have the class to bring my own pen and have most of it done before I have a total. I am real fast because I have so much practice.
Actually, in the UK, “cow” or “silly cow” is used often to describe a idiotic woman - fat or not. Even more funny, the A-Bomb of a word “c*nt” is used to describe an idiotic man, and never a woman… Ah, viva la cultural swearing differences.
“Merchants hate people like you. Most have to remit 2-3% back on credit card purchases.”
O, pity! The fledgling concern of Starbucks will have to find a way to scrape by!
We use our credit card wherever possible and pay it off in full every month. We earned three free airline tickets so far this year, and by year end will get two more from the mileage. It adds up to a free family vacation every year from the points.
Studies had found that people spent more money when using credit/debit cards than when using cash because they lack the immediate negative feedback of an emptier (or empty) wallet.
That’s why merchants accept credit/debit cards even for small transactions in the hope of making up the 1-2% card fees on greater volumes of business.
This is also why it is better to use cash if you want to be frugal unless you are exceedingly disciplined about spending money.
I am with L-train on this one: mileage and expense tracking. I charge everything I can, get a free loan from the credit card company, then pay to zero when the bill comes. What amazes me is that people actually pay cash for things. Amazing.
Years ago when I was a pup, my accountant said if I could live on my credit card and out of my check book, it would make his work more accurate, quicker, and more importantly my bill smaller!!! hehehehehehe
“What amazes me is that people actually pay cash for things. Amazing. ”
I pay cash for almost everything. I don’t remember where, but I read somehwere that the government and people are trying to create a cashless society altogether, and that it was not a good thing.
At the moment I am learning about gold, and came across
something interesting from a money site… here are a couple of paragraphs…
What is Money?
Today our monetary system is made up of fiat money - money by “decree”, or simply - money printed “out of thin air”. Fiat money has been tried for thousands of years but it has one thing in common. Every fiat money system in the history of the world has eventually failed. This is a very important fact! Eventually ours will be no different! The question is, how long will it take and what form will that destruction take place.
Contrast fiat money – created by man - with God’s money which is silver and gold. I believe there is a reason why a limited amount of these “precious metals” have been placed in our earth by our Creator. It was to limit the rate of growth of the money supply, thus helping man keep in check problems with greed and debt. Our founding fathers were smart enough to see that God’s money would protect the people from mismanagement of the country’s monetary system by the government.
Happy LA renter, I think that you’re onto something, and correct to distrust fiat money.
And this discussion, I believe, is not too off-topic for this blog. Many people would say that Greenspan holding interest rates too low (even below the rate of inflation), for too long, is one of the biggest causes of the housing bubble.
About a year ago, I had no idea why interest rates had such an effect, or even why the government was in the business of controlling any market interest rates in the first place. And that’s when I read up on the “Austrian” school of economics.
I now buy into the problems you identified with fiat money.
When the Fed sets interest rates low, it is easier for banks to borrow money, if needed, to meet their cash reserve requirements. When it’s easier to do that, it’s easier for the banks to create money out of thin air, via bank loans, and meet those reserve requirements.
But this system is bad for two reasons, the first of which is arguably why this blog exists. It’s folly to think that some government bureaucrat should be indirectly determining how much lending should occur, rather than letting the market itself completely take care of this.
The Fed often gets the optimal level of interest rates wrong, hence you have these crazy boom and bust cycles, which are much larger and more destructive in amplitude than the natural ups and downs that would otherwise occur in the complete absence of the Fed.
This housing bubble is good example. All this money created out thin air flowed into one asset class (housing). That made people feel artificially wealthy, spurring consumption that was not based on real productivity. As noted in the recent NYTimes article mentioned on this blog, consumption has been fueled in part by alpha-males (and everyone else) sitting on their asses draining their housing ATM’s. But all of those HELOCs essentially take the made-up money out of the housing asset class and launch it into the general economy, thus raising consumption and, eventually, prices.
This causes “inflation” and then the Fed has to raise rates to clean up after the mess it just caused (the alternative is to not raise rates, and let the dollar collapse). So the housing bubble and the Great Depression are great examples of this problematic boom and bust cycle phenomenon.
The second problem with fiat money is that it is legal counterfeiting and a stealth tax. At first I was skeptical of this idea, but let me give unfamiliar readers an analogy.
Imagine that I have a machine in my house (actually, rented apartment
) that allows me to manufacture $20 bills that absolutely no one would recognize as a counterfeit.
If I make a $10 million dollars with this machine, it’s a windfall for me. I can go purchase a yacht and, at current prices, maybe a small 400sf shack in California. This new money is also a slight boon for those around me - e.g., the guy who sold me the yacht sold one more yacht than otherwise. So he is also pretty happy with my machine too, though he doesn’t realize it.
But eventually my counterfeit money diffuses into the general economy as a whole. The overall number of dollars in the world has now ticked (albeit slightly) higher, in relation to the amount of goods, services, land, etc., that exist in the world.
Essentially what I have done is purchased my overpriced CA shack and my yacht at the expense of the purchasing power of everybody else.
Think this is not true? Then ask yourself whether we’d all be millionaires if EVERYBODY had one of these machines tomorrow morning.
Would we all be able to stop working and ride around in yachts?
Obviously not, it would just cause the price of everything to go higher. Thus, nothing in life is free. A price is paid for everything — even my yacht — even if the true burden is borne by somebody else other than me.
Well, this is exactly what is happening with the Federal Reserve system. Banks (and the government) get to create money and diffuse it into the general economy, at the expense of the aggregate purchasing power of the general public as a whole. For each member of the public, this decrease in purchasing power is only a little at a time — so that most of us don’t notice or even think about it. But over time this is a big deal.
And the Fed is so good at what it does, we the general public are trained to thank the Fed for this!
Obviously, people can post their Keynesian critiques of all of this analysis (and I admit, even before they get posted, that there are some strong counterarguments to my thoughts, and that not everyone would see the Great Depression in the same lens).
But it’s important, especially for us housing bubbleheads, to at least debate what in my view is one of the biggest sources of the housing bubble.
For a very early discussion of inflation go read “Wealth of Nations” by Smith. He spends a good deal of time explaining the rulers debasing of currency to fund the wars and other endeavors they were undertaking. After all, there is a reason it was called the Pound Sterling. What we have going on now is the exact same thing except with a fiat currency based the on the full faith of the US govt. Many will argue that this system will never fail, but in my experience never is a long time and highly unlikely events occur all the time - every lottery winner can attest to that.
As far as Keynes is concerned, read Hayek and I think you will get an idea of who was right and who was wrong. I think Keynesian economics as applied by the US govt is going to go down in history as one of the biggest boondoggles the planet has ever seen.
As an example look at the GDP for the US as measured by Keynesian economics. It is currently sitting at about 11 trillion dollars. But if you take out the gov’t spending (Federal, state and local) component the real GDP is about 5 trillion less or 6 trillion dollars. Almost half of the economy is gov’t spending. I don’t know about you, but I have yet to see the gov’t spend money on anything in an efficient manner. Why should gov’t spending be included in GDP? The gov’t is a parasite that inefficiently redistributes wealth to the politicians benefit at the cost of the citizen of the country.
Gov’t spending is not included in GDP by Keynesians or anyone else. GDP is the total production of goods and services. Gov’t spending just happens to be less then this - it’s part of consumption not production. And if you think gov’t can’t spend money efficiently on anything, imagine how well a private sector fire department would work (I mean truly private, where each homeowner could choose or not choose fire protection at will).
The US gov’t practiced Keynesian economics from 1933 to 1980, during which the US achieved the greatest economic growth of any country in the history of the world. It was abandoned by the Reagan administration which ran deficits during good times, the opposite of what Keynes said.
What does distrusting fiat money have to do with using cash over credit cards? Theyre the same currency, in different modes, there both fiat.
I heard someone on the radio remark that military spending as a percent of U.S. GDP today is about 2%, and in 1962 it was close to 10%.
[What does distrusting fiat money have to do with using cash over credit cards? Theyre the same currency, in different modes, there both fiat.]
One is a loan that expands the money supply. The other is a simple transaction that doesn’t expand the money supply. Recommended reading is The Credit Bubble Bulletin by Doug Noland at prudentbear.com.
Yogurt-
I’ll just point you to any gov’t site describing the components of GDP. Here is one if you can’t find it.
http://research.stlouisfed.org/fred2/categories/18
or
http://en.wikipedia.org/wiki/Gross_domestic_product
If you look at the growth in GDP over the last couple of years and compare it to the deficit spending by the gov’t you will see that about half of the growth has been because of deficit spending. There are a few economists that are proclaiming that we never left the recession of 2000-2001 instead we have masked it with deficit spending and real estate.
As far a privatization of gov’t services, just because it hasn’t been tried don’t count it out. Where I live the paramedic service has been transferred from the fire department to a private company. Other than bitching by the fire department, there has been no interruption in service and things are going smoothly. In fact the Fire Department itself is facing a financial crisis as the largess of the city council when it comes to retirements is on the verge of breaking the budget.
That economic growth you so proudly proclaim actually started in the 40’s with WWII and continued because the US was the only intact major economy after the war. As soon as the other companies rebuilt the growth in the US slowed dramatically.
Could have been “charging” to their Checkcard - it processes as Visa or MC charge but it comes out of your checking account. Same as debit as far as what the source of the money is.
My checkcard also earns points though i can’t be bothered to figure out what exactly those points do - I just use it instead of cash because it is so easy to moooooooo.
I use a credit card (my one card) for virtually everything outside of rent, utilities, and groceries. I get free credit for up to a month, no annual fee, the credit card company gives me a nice itemized statement each month, and I pay it. In full. What’s wrong with that?
Transactions are converging to be 99% electronic in our lifetimes.
If the clerk was asking debit or credit, the purchasers were putting it on their bank card which was probably withdrawing from their checking or saving accounts (this is news?)…..it’s not credit…just a form of the cashless society.
I always choose credit when using my check card because some merchants charge a fee for debit.
I never use debit. I use cash for small amounts ($20-$30 or less), credit for larger. Pay the credit card off in full every month.
I know of three people who recently had erroneous charges to their debit accounts. All the charges were approximately $1500; all from foreign countries. Apparently, this is becoming increasingly common with debit accounts. And the kicker is - these people may end up liable for the bogus charges. Credit cards will give you protection against fraud; debit does not always.
When my bank sent me a new ATM card, they automatically sent it as a VISA debit card. I told them I don’t want one - just want an ATM card. No such luck. So I’m stuck with it - but I only use it as an ATM. Apparently, that’s the best way to protect against this latest debit fraud.
“If the value of their house declines sharply, borrowers could wind up owing more than the house is worth. If they have to sell, they would have to pony up cash.”
Ok, eliminate the word “sharply” here. When you buy a house you’re already in the hole at least 6%. If you were to sell your house the day after for the same price as you bought it, you would have realtor fees of probably 6%. Then you can tack on the standard splitting of the title and escrow fees (at least here in the west). That’s at least a percent or two. So you start to see that you better get some appreciation in hurry if you plan on selling your home right away, because a flat market leaves you in the hole. Seeing that we’re already experiencing a flat or negative YOY in most areas, any one who bought with 100% financing in the last year is close to 10% in the hole, best case.
Several months ago someone posted a story of a triple-home triple-heloc by gal who rolled them out buying a new home with the heloc on the old home. She made it to three homes with three helocs, then rolled them all back up into foreclosures and is now living at home with her parents. She was way ahead of the curve.
You have no idea how many have played this game in the great ponzi sheme of our time. Cashing out equity and rolling it to more property was the big thing in ‘03, ‘04, and parts of ‘05. You start to see how all this liquidity that was propagated by Mr Greenspan got injected into the system.
Hehe, Now THAT takes some talent. To actually go BK DURING the runup. Impressive!
Sounds like a good plan to me! I would’ve never thought of that.
A family member of mine bought with a HELOC (piggyback loan). She’s able to handle it, but she hates it. She’s been working to pay it off, but she also likes to have cushion of cash saved, so it has been a little tough for her to do both.
At least she has the mindset of working to pay it off. Unlike the average American debt slave who hopes for appreciation to lift them out of their troubles.
The idea has been, for some time now, to “manage” your debt, instead of paying it off.
1. Paying off debt.
2. “Manage” debt.
3. Dig out of bankrupcy.
4. Manage bankrupcy.
Damn, this clusterf*** won’t stop.
She plans on staying in the house she’s in for the rest of her life, if she can. She got it for an OK price, not high, but no great bargain, either. She had the cash for a downpayment, but it would have wiped out much of her reserve, so she opted for the HELOC instead. But it really bothers her to have it. It would bother me, too.
If she had enough cash for the down payment, and borrowed the down payment via a HELOC, then presumably she has enough cash to pay off the HELOC entirely. Given that she is at least a bit risk-averse, she cannot be earning much interest on her savings and it probably is far less than the interest rate she is paying on the HELOC.
So the only plausible reason I can think of that she would not pay off the HELOC with her savings, if she is rational about the numbers, is that she is afraid the value of her house will decline to the point where she could not get a HELOC at all, were she to have an emergency.
Conclusion: She couldn’t afford the house in the first place.
“Conclusion: She couldn’t afford the house in the first place.”
Yup. I didn’t have the heart to phrase it that way, but it sure appears to be the truth.
In my neck of the woods, I know of small business owners using HELOCs to cover cash flow losses and one flipper who is stuck with 4 new homes, that he is covering with loans on his primary house.
Dead man walking…….
I’m in Calgary and everyone I know is HELOCing like crazy. House prices went up 50% in the last year, but are now starting to come back down. Uh-oh. Didn’t see that coming !
I know a guy that HELOC’d his house in late 2004 to finance his business and did it again recently to buy a vacation property on the coast. And a big, used boat. Last I talked to him, he was very grumpy about the boat. Something about a hole in the water in which to pour money.
I think they are in way, way over their heads. I hope not, but I fear it.
How does the old saying go? The two happiest days in a boat owner’s life are the day he buys it and the day he sells it.
I prefer:
If it floats, flies or f@cks rent it.
So how does the Calgary guy make his HELOC payments? With more HELOC money? Isn’t that the equivalent of kiting checks?
HELOC is delaying the BK process for many of these owners. Even though the HELOC interest rate has gone up substantially from a year ago, extracting these quickly reducing equity is the only way many FBers can keep their houses since their real incomes are much less than the monthly mortgage.
Gosh, isn’t this going to be fun in Bankrupcy court with all these note holders. I sense a bull market in lawyering. But they always seem to be in a bull market.
Don’t know if you heard the NPR report on people filing for BK and having their mandatory phone “counseling” to see if they qualify for full or partial BK. The counseler intervewed said he was supposed to spend a mandatory 30 minutes interviewing the clients but was finding that within just a few minutes he was discovering these people were so far gone they had to go full BK and he spent the next 25 minutes talking sports.
The recent federal BK “reform” was a cynical joke: prove no one is abusing the law by making the poor and middle class do counseling, etc.
This was nothing but cover to hide the real abuses that only the rich can afford: trust funds and other no-touch accounts; state property exclusions; and various non-priced asset vehicles.
When you are bankrupt with $1MM in cash, you aren’t going to need to use soup kitchens these days.
I don’t think there will be much bankruptcy work for the lawyers. Bankruptcy won’t do anything to help these folks: if you can’t carry the existing debt with your current cash flow, there’s no point in filing a bankruptcy case.
The real work for th bankruptcy lawyers will be in the failure of housing-related industries. Which is about half the economy right now.
I don’t see how those companies will be any better business. While the realtors are already howling about having only one or two settlements a month now, title companies are laying off their abstractors and settlement attorneys that I have talked to are mumbling about retiring or chasing DUI’s, none of them will qualify for bankruptcy. Corporations simply dissolve, and Chapter 13 has been reduced to an asset preservation process for those who have any assets left - which these folks will not. Only the folks who actually lose their jobs or take McJobs will qualify for Chapter 7 and what, exactly, will they do in 90 days or so once they get their discharge?
time for us all to take our LSATs!!!
“The ease of obtaining a Heloc makes them very tempting. ‘It means mostly just walking down to the bank and asking for one,’ says Keith Gumbinger, vice president at a publisher of consumer loan information. ‘Many people are using it for day-to-day expenses. For them, the danger is they’ve been given a new tool, for digging themselves a deeper hole.”
Which brings up yet another advantage of renting: You don’t have to worry about throwing away your money on HELOC interest payments!
“Which brings up yet another advantage of renting: You don’t have to worry about throwing away your money on HELOC interest payments!”
That’s exactly what I was thinking as I was getting into this thread.
you just have to love how the mainstream media is suddenly “getting religion” about this whole mess. As others have pointed out in the last week or so of postings, it seems like the worm is definitely turning. The media is singing a different tune.
For two or three years us RE bears have berated the media for ignoring all the warning signs. The irony is that their delay in sounding the alarm only makes the inevitable outcome even worse.
Not only that but hardly an article goes by now without a quote from some “expert” that has been calling this for the past couple of years. WTF? Total BS but now everyone is a genius for having called this.
Suzanne called this.
Suzanne called this “Uh-oh”.
Main stream media is not in the business of predicting outcomes, only reporting what has happened (and applying a bias). During the run-up the MSM wrote about the run-up. During the decline, they will speak about the run-up as thought it is not happening. When they speak about how horrible RE is (or stop writing about it altogether), consider buying.
MSM is a lagging indicator. Their involvement, though, can hasten the outcome of things.
you just have to love how the mainstream media is suddenly ‘getting religion’ about this whole mess.
Yes. On the way up, they cheered. HELOC! Easy money! Home improvements! Hot market!
Now, on the way down, they’ll scold, scold, scold.
As ever, the function of the US media is to manufacture consent for elites and, when their projects fail, as inevitably happens, flog the rabble mercilessly for having believed in them. It works very well on a population with no attention span. By this time next year, the press will be writing about the bubble as if it were fully the invention of greedy ordinary folk who got it in their heads they could live like their betters. This gambit, too, works well in a culture based on puritanism. Upside down? Wolf at the door? Let the poorhouse be a lesson to you swine! Etc.
Have to agree. Backstage, the press did indeed cheerlead by proxy for almost all of last year, choosing to quote RE sources who denied the bubble and its dangers, and ignoring economists who had enough data and enough of a long view to be able to warn consumers about the dangers ahead. (Consumer Reports realized this in 2004 I believe– a mag that doesn’t take ads-wonder why the rest of the media couldnt..).
The global warming scientists the press screwed (along with all of us) were at least lucky enough to be included in climate stories for “balance” — not many RE stories last year even gave economists that courtesy.
The press pied-pipered the NAR’s 2005 predictions of 5-6 percent price appreciation in 2006 and looks like a lot of folks just followed blindly.
“She explains that some banks would extend a conventional mortgage loan for only 80 percent of the purchase price. Borrowers had to come up with the rest as cash downpayments. The bank would extend a Heloc, which was backed by the equity of the home, for all or a portion of that downpayment.”
In what banker’s risk underwriting calculus does borrowing another twenty percent equate with “coming up with” a cash downpayment?
80 percent converntional mortgage. who cares about the rest. now you get the idea how they will extend this bubble and just wait until inflation eats up the bloated price.
“Banker’s risk underwriting” –what’s that? Oh, wait… I think that was something they had before the GSEs and MBSs took all the default risk away from banks. Sounds quaint, even kind of cute… like those old-fashioned “down payments” or “income verification” they used to require. Wonder if those will ever come back? Nah, I think hula hoops and beehive hairdos have a better chance.
Don’t get me started about the underwriters. They’ve been asleep at the switch for the last two years. By the time they wake up and realize they should have been paying attention, the building will be crashing around their ears.
I think the commonly used word ‘homeowner’, should be replaced in most cases with the more accurate term ‘homeower’.
out with the N!
Another one - homeowned
Often, the rate on piggy back HELOCs are higher than typical HELOCs because the Combined LTV is higher on the purchase ones. Therefore the current rates on high LTV purchase HELOCs are often one percent or so higher that others, which puts the rates in the high 8s to low 9% range. When people got these a couple of years ago, the rates were in the 4s and 5% range.
The tactic of refinancing and combining the two loans into one 80% first loan, requires the value to increase 25% on 100% financing (80/20.) This was done in the past, but can’t help people who bought in the last 2 years.
Oh man, this gives me a headache to even think about. It makes me nuts to owe someone $1.
Speaking of which, where is that $1 you owe me?
at the height of the housing bubbles, there were articles touting the facts that rich people were now living in middle class neighborhood. that there were mercedes parking next to hyundai.
well let me tell you. when dogs and cats have sex in the street, you know it’s apocalypse time. just like when people who vacation in the swiss alp live next door to people who drive to aunt margaret for vacation, you know it’s a housing bubble. haha. funny but true.
“Dogs and cats”? I didn’t even understand it but man did I laugh. Thank you.
Bill Murray from Ghostbusters.
Let me say the rich person had the Hyundai and hte middle class person had the Benz? Most rich folks I know (real ones mind you) are pretty tight.
BTW, I am out roving the country scaring up new business. I have a rental Hyundai at the moment, not a bad little car! Easy on the gas too.
I have had my little Hyundai Elantra for the last 6 years. Not once, in that entire time, has it given me any major problems. Not one break down, not any engine trouble, etc.
The warranty has covered every single thing on that car that has gone awry (the gear shifter knob cap came off. Woo boy. The electric window level was sticking. The ashtray popped out of the rear.), which has amounted to nothing but nickle and dime crap.
The service has been excellent. I’ve never been given any crap at all when I bring my car in. Best warranty on the market, and the gas milage is fantastic. I spend 30 bucks a week in gas, and that gets me some serious commute time (about 2 hours of driving per day).
I would, and have, recommended them to everyone I know.
I too love Hyundais, theyre pretty awesome.
Most rich folks I know (real ones mind you) are pretty tight.
Me, too. The TRUELY rich ones - not the “I-own-a-house-that’s-tripled-in-value” rich ones. My parents came from modest backgrounds. My dad was a high school math teacher at one school his entire career (plus side jobs tutoring, working at local colleges, etc.). My mom didn’t work until we were all well into school and only then did she work because we moved up to a bigger home at the time (which cost a whopping $75,000 back in the late 70s and is now worth about $400,000). Anyway, my dad always drove a beater car and we lived very conservatively. Now in their mid-60s, my parents are wealthier than I think either of them could have ever imagined. They are totally set for life (dad retired early, mom only worked a few years). Oh and their $400K house has been paid off for years. As have the helocs he took out during our college years so all three of his kids could go to state schools without loans. Damn proud of the man. Goes to show, though, that the richest people do NOT always drive Mercedes.
Thus one of the ironies of life:
To look rich one must spend money
To be rich one must not spend money
If they have to sell, they would have to pony up cash.”
Nah, it’s much easier to leave the keys on the table. Plus ponying up cash is no fun, and for most people, its impossible because our savings rate is negative!!! Damn foolish assumption…
I agree. Get all the HELOCs and credit cards you can, quit you job (or better yet, get fired), take expensive vacations, gamble and drink a lot, give lavish parties, and eat every meal out until the cards are maxed out. Then declare BK, drop the keys off at the bank and drive away in your Hyundai.
If you’re gonna do it, do it in style. Take as many down with you as you can.
My broker told me not to go BK, because i didn’t owe that much yet. I followed his advice, got a better job, and now am debt-free.
He also said if you’re going banko, make sure you do it for a BIG amount. At least enjoy it, because you won’t get to spend like that again for more than 7 years…
LOL
That was funny!
question about this heloc. is this a line of credit in such a way that if you are extend say a 100k and uses up only 2k, the interest you pay is only for the 2k. fair enough. but are you allowed to draw only a partial amount? or do you have to draw the 100k and pay interest on the 100k, it is up to you where to stash the rest of the amount you do not need, yet?
In my short experience with a HELOC, you only paid interest on the amount withdrawn, which is something nice but makes it tempting to use on frivolous things. At a certain point, you can no longer draw from the credit line, five years in my case.
I switched to a 4.9% fixed Home Equity Loan when the fed funds rate increased to 2.25% and HELOC became 5.25%.
Now I’m a debt free renter.
I have a question about HELOC’s. If you HELOC your house to its full value then prices decline considerably, can the bank decrease the line of credit? Also I’ve heard of fixed rate HELOC’s does anyone know about these?
My friend’s Dad wants to buy some destressed properties in the future for rentals, but is worried about higher interest rates in the future as well as illiquidity preventing him from getting a loan on an investment property.
Could a fixed rate HELOC secured now on his $700k house provide funding to buy in a few years when houses in his neighborhood drop to $300k or so?
-destressed
+distressed
Not sure what destressed means, but it sounds relaxing…
Home Equity Loan is for a fixed amount that you borrow and pay back, similar to yor first mortgage, and can be fixed or adjustable rate (usually the latter, though, I believe).
HELOC (Home Equity Line Of Credit) is for a variable amount. It’s a “line of credit”. You can get the HELOC and not take *any* money out in fact, hence no payments, and get a checkbook to write checks tha go onto the HELOC balance, and they you pay interest and principle. Many people get the HELOC with a fat wad of borrowed cash at the inception, though.
I have not heard of any HELOC that is a fixed rate, which is not surprising. Perhaps they exist, but it sounds like a bad deal for the bank, and banks are notorious for making bad deals for YOU, not for them.
“Even though the cost of having a Heloc has soared, their popularity hasn’t declined. According to the FDIC, the dollar volume of these loans hit $531 billion in March, the last figure available, up 28 percent form $416 billion in June 2004.”
This is total volume to date, right? Not that taken out in one month, right? Anyone? Bueller?
“According to David Barr, a spokesman for FDIC, homeowners had turned away from refinancing their primary mortgages recently because of higher interest rates. ‘But they keep turning to Helocs to extract cash from the equity in their homes,’ he says.”
This makes no sense at all, as I see it, because HELOCS are at just about the same rates as 30 year fixed, give or take a few .0x points.
What he must be talking about is bank debtors who DON’T have a FIXED 5.5% on their first mortgage from 2003.
All the Johnny come latelies simply don’t have this option, which is why I’d think that, for them, a fixed at the current rate would be better than a HELOC. Follow?
So, why is the author ignoring those who have bought using adjustables?
Hmm…. More obfuscation.
“The ease of obtaining a Heloc makes them very tempting. ‘It means mostly just walking down to the bank and asking for one,’
Thank god the avalanch of refi and HELOC offers has finally reduced to a trickle, my e-mai was full of them and I could have heated my house with all the snail mail offers I got daily. Yes, I really buy that I can borrow money at 1.25%, riiiiiiiight……..
“Even though the cost of having a Heloc has soared, their popularity hasn’t declined. According to the FDIC, the dollar volume of these loans hit $531 billion in March, the last figure available, up 28 percent form $416 billion in June 2004.”
this raises more q’s than it answers.
to auger, i would lean towards a ytd number. extropolating through dec ‘06 puts it at 2 trillion over 12 months.
which brings us to point B. we are assured of no landing whatsoever through at least 2009 if you run these latest numbers out 3 years to reset. we could either hit the mean, or touch down below sea level somewhere.
there’s a death valley irony lost in here….
Totally OT: Ya’ll gotta read this. I’m still crying from laughing so hard. The part about the guy getting 17 tickets put me on the floor:
http://www.craigslist.org/about/best/lax/184295834.html
I must admit I have a few tears myself after reading that.
Oh yeah? That was funny. I found this today as well. I was crying from laughing so hard at work that people from all over the office had to stop by my desk to ask what was wrong.
http://chroniclesofgeorge.nanc.com/
I felt like I was reading the spiel of some really bad stand up comic doing really cliched material. “Oh that kid of mine! With his rap music and dyed hair, that punk got 17 parking tickets this year! Im gonna put some fear into him.” *audience dead silent*
So did I. Pretty lame stuff, a Reader’s Digest laff-fest. Creepy ending, too, with the surrendered wife and the kids all getting the Abu Ghraib treatment from the absent father who realizes that his family’s dysfunction is a cry for…hell.
Wow, that is quite a story. I see a screenplay here. Would not want Steve Martin in the Father role, he’s always the Dad that gets walked all over and I’m sickened by his pathetic characters. Tom Hanks could pull it off.
Once we finally exit the excesses of the past decade and people go through a lot of financial pain, this is the kind of story which will have resonance for the mainstream. I imagine everyone is pretty sick of spoiled, vacuous, amoral brats with a major sense of entitlement (of any age).
I agree, there has to be some sort of movie based on this. I was laughing in the office.
I love this one “The youngest child is on a diet - now.”
ROTFL
He tells me he stopped me for having an illegal exhaust (no s*!% - it sounds like two-dozen weedwhackers coming down the street).
If only the police would pull over and ticket every yute around here who had one of those completely ridiculous exhausts. I think they’ve become my biggest pet peeve.
What is the big deal? I finally figured out the trick to make the HELOC work to my advantage. I borrow more than I need, and part of that goes in the bank to cover the extra monthky cost. But get this, after doing this five times every year except twice in 2005 my morgage broker fianlly told me about these interest only loans. They are feaking wonderful. I just got one, and get this, interest is only 2.2%. Unbelievable. I wrapped my primary loan and my heloc together to get this unbelievale rate. The only draw back my morgage guy mentioned is that it is some type of “neg am” loan. Not really sure what that means, but he said not to worry, everybody was doing it. I was a little suspicious, so I asked my neighbor, and he said he has the same loan type. I ask my other neighbor and he said he does the same thing.
I love real estate. By the way, my motrgage broker said the interest rate is only good for 1 year then it adjusts. He also added that he will help re-fi next year before it goes up, get this, he will do 105% financing. I was kinda getting worried becasue I am already at 100%, but hey the market has been going up 20% a year here is San Diego. So what if it only goes up 10% this year. I am golden. After this next re-fi I won’t be taking anymore money out becasue I will be retiring in three years and moving to AZ. I will sell my home, and all the profits I make will be used to buy a home in AZ. Those guys in AZ are headed for trouble, I will be able to pick up property .50 cents on the dollar in three years. Its a good thing I have all this equity in my home. Bo-ya.
Your kidding right
he’s already “tapped” his “inner boo-ya.”
Now I see the error of my bearish ways. My mind has been too clear and simple to grasp the complexities of modern real estate and RE finince. I always throught that if you borrowed money, at some point you would need to pay it off.
I now see that I was wrong. I intend to make things right by buying distressed homes from flippers, so that they can become destressed. If we all did that one thing, the workd would be a better place, don’t you think.
Love it.
[“According to David Barr, a spokesman for FDIC, homeowners had turned away from refinancing their primary mortgages recently because of higher interest rates. ‘But they keep turning to Helocs to extract cash from the equity in their homes,’ he says.”
“If the value of their house declines sharply, borrowers could wind up owing more than the house is worth. If they have to sell, they would have to pony up cash.” ]
It’s almost as if the Fed is admitting that the Fed is causing the problem. All the Fed has to do is either raise interest rates to the point where it makes no sense to HELOC or change banking regulations to sharply reduce this practice.
Gold and energy are taking off for a variety of geopolitical reasons but they are definitely signalling inflation as anyone with a shopping cart can attest to. The Fed is “wrining their hands” over inflation and stagnation. They caused the problem in the first place but are having a tough time making politically difficult choices.
‘But they keep turning to Helocs to extract cash from the equity in their homes,’ he says.
It’s those Olive Garden bills–you’d mortgage your own ass to keep eating there!
One of the largest appeals of this blog was that everyone made an effort to keep their political beliefs to themselves. Please don’t let more posts turn into partisan mud-slinging and childish spelling corrections.
Focus: Here in Virginia Beach a few people are slowly starting to realize that the housing market might not yield 20-30% every year. However, several well-respected business owners I know are dolling out the “real-estate can only go up”, “take out equity - it’s free money” and “you can always sell” advice…this area is going to get hit very hard.
The problem with keeping political beliefs to oneself:
This credit bubble (and housing bubble) is directly related to governmental (read: bank) interference. Economics = politics. Politics = economics.