LAT: Homeowner Debt Increasingly Seen as Savvy Strategy

[DeepModem Mom]

Homeowner Debt Increasingly Seen as Savvy Strategy
Mortgages used to be something people strove to pay off. Now they've become income tools -- but risky ones, some financial analysts say.

By David Streitfeld, Times Staff Writer


As they happily watch their houses swell in value, Americans are changing their attitudes toward mortgage debt. Increasingly, a home is no longer a nest egg whose equity should never be touched, but a seemingly magical ATM enabling the owner to live it up or just live.

Homeowners took $59 billion cash out of their houses in the second quarter, double the amount in the 2004 quarter and 16 times the average rate of the mid-1990s, according to data released this month by mortgage giant Freddie Mac.

People are cashing out so quickly that the term "homeowner" may soon be inaccurate. Fifty years ago, Americans owned, on average, three-quarters of their house and the lender owned the rest. These days, it's approaching an even split.

This spend-now-rather-than-save-for-later phenomenon has produced undeniable benefits. Experts attribute much of the nation's economic growth to cash-out refinancings, home equity loans and other methods of tapping rising home values. And additional real estate investments financed by home equity have contributed to the rising home prices that bring owners such pleasure.

But the spending spree has a price. With the savings rate at zero, consumers' eagerness to tap home equity is only worsening their retirement outlook, financial advisors say....


http://www.latimes.com/business/la-fi-homedebt28aug28,0,6044251.story?coll=la-home-headlines

[DemInDistress]

1. I have a question about "interest only" payments

If you close a deal paying just interest only for lets say 2 years,do you lose the 2 years worth of equity? Is there such a thing??

[seriousstan]

3. There is no equity.

You contributed nothing toward equity, principal, this was "interest only".

[mbperrin]

2. Stupidest statement yet.

"If you paid your mortgage off, it means you probably did not manage your funds efficiently over the years," said David Lereah, chief economist of the National Association of Realtors and author of "Are You Missing the Real Estate Boom?" "It's as if you had 500,000 dollar bills stuffed in your mattress."


Check out another angle:

"If you haven't been selling heroin, it means you probably did not manage your funds efficiently over the years," said David Lereah, chief economist of the National Association of Drug Dealers and author of "Are You Missing the Drug Boom?" "It's as if you had 500,000 dollar bills stuffed in your mattress."

Makes just as much sense.

Debt discounts the value of labor going forward. Tremendous amounts of debt reduces the value of labor tremendously, and that is where it will come out.

Spell Depression? Thought you could.

Obviously the real estate market needs a little hype so the big guys can cash out even higher!

[punpirate]

6. Methinks statements such as Lereah's...

... are meant to keep the boom going long enough so that the big guys have time to cash out.

This is another classic bubble, and it will end exactly the same way--possibly much worse, because we're not talking about a stock gone bad, but quite literally, the roof over many people's heads.

But, what bothers me about this is that it's blatant. With the financing going on, it looks more and more like a Ponzi scheme, at worst, or at best, an MLM scheme--the people on top get out with the real cash.

But, with potentially tens of millions of people at or near the bottom of the pyramid, is the real estate business counting on Congress to create some kind of bailout, ala' the savings and loan debacle, and try to transfer all this debt to the taxpayer? That, ultimately, causes another round of different troubles.

[sendero]

13. Numbnuts..

.... like this fool:

"If you paid your mortgage off, it means you probably did not manage your funds efficiently over the years," said David Lereah, chief economist of the National Association of Realtors and author of "Are You Missing the Real Estate Boom?" "It's as if you had 500,000 dollar bills stuffed in your mattress."

Guess what Mr. Lereah? (who is undoubtedly paid well to have a stupid opinion)

Lots of folks have found out to their dismay that what you call "investing" is merely little more than "gambling". The stock market can take a swoon at any time, many of us have not forgotten about 2001. I know you'd say "yes, but over the long term stocks always perform well" and I'd remind you of the aphorism of one much brighter and more accomplished than you who said "but over the long term we're all dead".

Everyone is this goddamned country thinks they can "beat the reaper" financially and 90% of them get taken to the cleaners.

So personally, I'll just pay off my house, buy things with cash, put some of my liquid assets into something tangible and wait for the economic catastrophe that is inevitable because of idiots who think like you do.

[aquart]

4. We're insane.

[NMDemDist2]

5. yup n/t

[jab105]

7. I have $7000 left to pay and my house will actually be mine...

granted...it was a lot cheaper than what they are talking about...I couldnt have afforded a 20 year old trailer in CA...

[Starbucks Anarchist]

8. I heard that only 15% of L.A. County's residents can afford a home there.

[wli]

9. here comes Great Depression v2.0 n/t

[I_Make_Mistakes]

10. My fear about another depression too!

I worked for a mortgage company (in IT) in the late 80's. In IT, if you're any good, you also learn the business. I was talking to a loan officer of a local bank, and we were talking about the loan to debt ratio's used today vs. 10 years ago and it is frightening.

Back in the day, 10 - 15 yrs. ago, they were somewhat, but not very Conservative in lending, today, your loss is my gain.

It has gotten to the point, where like other debt, they actually make tons of money if you fail, very early. What the Hell happened to informing consumers and providing, some protection (by stiffer requirements)?

The greed and self interests have become more important than working together to make this a great place to live. It is repulsive and sad at the same time.

When, the robbery barons make this country third world, where will they live? They hate, pretty much, the rest of the world, they will live in their self-created Hell too! That is the only satisfaction I can get out of this self created situation.

[sinkingfeeling]

11. Yeah, he guy's right and in 5 years, I'm taking the $500,000 + out

of the mattress and moving debt-free to Ireland!

[sendero]

12. All of these dumbasses..

.... who are saving nothing and thinking SS is going to save them are in for a rude awakening.

The trifecta of 1) no assets 2) decreasing SS benefits (a virtual inevitability) and 3) no pension

... is going to leave a lot of Americans in dire straights. And they really have no one to blame but themselves, I'm not feeling a huge amount of sympathy for middle class people who cash out the only nest egg they have and blow it.

[teryang]

14. Inflating out of obligations

pay back debt with cheaper dollars. The government and central banks can play this game, individuals cannot. Individuals who do are gambling pure and simple.

Savers and the fiscally conservative are suffering during the bizarro economy where spendthrifts are rewarded for irresponsible spending. All you can do is retrench and wait for the other shoe to drop. I agree with those who anticipate a stiff recession, if not worse.

[bemildred]

15. Leverage.

Just like trading stock on margin.

You put 10% in and service the debt while the value of the
property appreciates. High value properties are "better"
that way, too.

You can make huge "gains" and take them out tax free, as
long as you arrange a "liquidity event" at the right time.

A great game as long as it lasts. I wonder if this will be the
great market crash this time around instead of the stock market.

[teryang]

16. Reverse leverage

Once the short term trading gains are gone from financing the mortgage, it becomes a hot potato to get rid of because its a loss from day 2. The government subsidized holders of last resort can't be solvent at this point. It's a huge problem that no one talks about. If its leverage to the home buyer, it's loss to the lender. Who is the guarantor? Oh, it's you and me, the taxpayer, just like the 80s remember? What did happen to those $350 billion in deposit and loan guarantees back then?

Who bought all the repossessed properties for pennies from the Resolution Trust Corporation after the US Government paid all the banks on the defaults? Who paid the losses? Oh, I remember, we did. The US taxpayer. Was it $350 billion for the bushistas and their friends or $800 billion? Doesn't matter it's well over a trillion today that they will confiscate at public expense. The economic contraction to follow will be more painful than the last one.

[bemildred]

17. A ponzi scheme were we get to hold the bag. nt