Debt Games Could Sink Homeowners
01-31-2005, 11:14 AM
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Debt Games Could Sink Homeowners
Hi, As some of you know I work for General Electric. No I don't build toasters. I work as an IT Project Manager for their Consumer Finance division. We provide Credit Services to retailers and consumers. Basically a Credit Card company or to some the devil.
Anyway, Just a heads up on an article that was circulated here. Read this very closely. It shows that people who leverage their house to the 'hilt to pay off high interest debts end up years later still in high interest debt and monsterous mortgage to add. Just a heads up there folks. Keep the modding to a minimum!
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ~~
Debt Games Could Sink Homeowners
Business Center News
Many American homeowners are addicted to a money game akin to "hot potato" that will end when too many consumers get financially burned.
The game is real and could easily be called "Extreme Household Debt." Here's how it's played:
The income of the average U.S. household, adjusted for inflation, has declined in recent years. To meet the fast-rising expenses of health care, education, gas and insurance - and, yes, often just to afford the next cool gadget - households have relied increasingly on credit card spending. When credit card debt becomes too big, households rush to refinance their homes at seemingly attractive, low mortgage rates. In the process, they borrow extra money to pay off their credit card debts.
Now saddled with a larger mortgage, households start anew to build up fresh debt on their higher-rate credit cards. At some point, debt becomes overwhelming. The game ends badly.
"At some point, when your income does not keep up with your expenses, it is called bankruptcy," says Javier Silva, a senior researcher at the Demos think tank in New York.
That's the short version of a new and disturbing study by Silva called "House of Cards: Refinancing the American Dream." It shows how millions of U.S. households are falling into a vicious cycle of tapping their credit cards and then refinancing their mortgages to extract needed cash from the equity in their homes.
What's driving this cycle? Households are using debt to bridge the financial gap between their incomes and expenses.
It's a seductive game. The appreciation of homes in most metro areas - certainly here in the Tampa Bay area - has been skyrocketing, adding equity for homeowners at a dizzying pace. And leveraging that new-found wealth is encouraged by a daily barrage of credit card and low-rate home refinancing solicitations, by Federal Reserve Chairman Alan Greenspan's "no worries" remarks in speeches and even by the deficit-prone Bush administration's go-spend-your-tax-cuts appeals.
"Part of the problem is people want to buy lots of things," Silva says. "But with stagnant wage growth and increasing expenses, families are feeling the pinch and mostly spending their home's equity to make ends meet."
If home values go bust - and who has not wondered in recent years about a housing bubble? - many homeowners will be devastated.
Silva's numbers are worrisome, focusing on the period since 2001 when low mortgage rates created a refinancing boom at the same time the economy was stagnating. During that period, households refinanced trillions in mortgage debt, but also cashed out a startling $458-billion in equity from their homes. That pace of cashing out equity is three times higher than any similar period since Freddie Mac started tracking such data 12 years ago.
A slim majority (51 percent) of households that refinanced between 2001 and 2003 used the cash equity from their homes just to cover living expenses and pay down credit card debt.
To many homeowners, swapping high-interest-rate credit card debt for a new low-rate mortgage seems like smart money management. And it is for some U.S. households - especially when mortgage interest is tax deductible and credit card interest is not. But it can be bad news for many other households, Silva explains.
Many homeowners are getting cash out of the equity built up in their homes while taking on larger mortgages. That makes households more vulnerable to emergencies like an illness or job loss, when a home's equity can act as a financial cushion of last resort.
Spending cash from equity also perpetuates bad habits by encouraging more consumption based on debt. This is no small matter with the U.S. household savings rate so close to zero.
Swapping unsecured credit card debt for secured mortgage debt is potentially dangerous. If problems arise in paying the new mortgage debt, the lender can seize your home as collateral. Credit card debt, in contrast, is not secured by your home.
When homeowners used the equity in their homes to pay down credit card debt, it was often a temporary reprieve. Silva says credit card debt is starting to rise again as households again start depending on plastic to cover the gap between income and expenses.
Why not just cut expenses? It's a good question, Silva acknowledges. U.S. households are too quick to splurge these days. But declining income and rising costs of basics - from gasoline to health care - are the primary reason for a financial gap now filled by credit card and mortgage debt.
Between 1973 and 2004, homeowners' equity fell from an average of 68.3 percent to 55 percent, the Demos study says. That means Americans own less of their homes than they did in the 1970s and 1980s. Worse, the percentage of monthly income that households must spend to manage monthly debt payments - a key measure of financial stress - is 18.56 percent. That's the highest since data started being collected 25 years ago.
Sound precarious? Sure does to me, especially at the start of a new year in which the Fed seems gung-ho to continue raising interest rates. Those are the same rates that will increase the cost of credit card debt and bump up adjustable-rate mortgages in short order.
In New York this week at a gathering of national retailers, St. Petersburg Times staff writer Mark Albright reports that economists are forecasting a weak year in which the "consumer may be tapped out."
Bingo. That's what happens in the game of Extreme Household Debt.
CASHING OUT
By refinancing, households cashed out $458-billion from homes in four years:
2001: $86-billion
2002: $108-billion
2003: $139-billion
2004: $125-billion
*estimated
Source: Joint Center for Housing Studies, Harvard University, Demos
WHERE DID THE NEWFOUND CASH GO?
Use of money from refinancing, 2001-02:
Repayment of other debts: 51 percent
Home improvements: 43 percent
Consumer expenditures: 25 percent
Stock market, real estate, taxes: 22 percent
NOTE: Percentages add up to more than 100 because some loans used for multiple purposes.
Source: Federal Reserve System
NOT EQUITABLE
Home ownership is up, but homeowner equity is down:
Year Home ownershipEquity as a percentage percent of home
1973 64.4 percent 68.1 percent
1980 65.8 percent 67.5 percent
1990 64.1 percent 61.3 percent
2000 67.7 percent 57.1 percent
2004 69.0 percent 55.0 percent
Source: Federal Reserve System, U.S. Census Bureau
Anyway, Just a heads up on an article that was circulated here. Read this very closely. It shows that people who leverage their house to the 'hilt to pay off high interest debts end up years later still in high interest debt and monsterous mortgage to add. Just a heads up there folks. Keep the modding to a minimum!
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ~~
Debt Games Could Sink Homeowners
Business Center News
Many American homeowners are addicted to a money game akin to "hot potato" that will end when too many consumers get financially burned.
The game is real and could easily be called "Extreme Household Debt." Here's how it's played:
The income of the average U.S. household, adjusted for inflation, has declined in recent years. To meet the fast-rising expenses of health care, education, gas and insurance - and, yes, often just to afford the next cool gadget - households have relied increasingly on credit card spending. When credit card debt becomes too big, households rush to refinance their homes at seemingly attractive, low mortgage rates. In the process, they borrow extra money to pay off their credit card debts.
Now saddled with a larger mortgage, households start anew to build up fresh debt on their higher-rate credit cards. At some point, debt becomes overwhelming. The game ends badly.
"At some point, when your income does not keep up with your expenses, it is called bankruptcy," says Javier Silva, a senior researcher at the Demos think tank in New York.
That's the short version of a new and disturbing study by Silva called "House of Cards: Refinancing the American Dream." It shows how millions of U.S. households are falling into a vicious cycle of tapping their credit cards and then refinancing their mortgages to extract needed cash from the equity in their homes.
What's driving this cycle? Households are using debt to bridge the financial gap between their incomes and expenses.
It's a seductive game. The appreciation of homes in most metro areas - certainly here in the Tampa Bay area - has been skyrocketing, adding equity for homeowners at a dizzying pace. And leveraging that new-found wealth is encouraged by a daily barrage of credit card and low-rate home refinancing solicitations, by Federal Reserve Chairman Alan Greenspan's "no worries" remarks in speeches and even by the deficit-prone Bush administration's go-spend-your-tax-cuts appeals.
"Part of the problem is people want to buy lots of things," Silva says. "But with stagnant wage growth and increasing expenses, families are feeling the pinch and mostly spending their home's equity to make ends meet."
If home values go bust - and who has not wondered in recent years about a housing bubble? - many homeowners will be devastated.
Silva's numbers are worrisome, focusing on the period since 2001 when low mortgage rates created a refinancing boom at the same time the economy was stagnating. During that period, households refinanced trillions in mortgage debt, but also cashed out a startling $458-billion in equity from their homes. That pace of cashing out equity is three times higher than any similar period since Freddie Mac started tracking such data 12 years ago.
A slim majority (51 percent) of households that refinanced between 2001 and 2003 used the cash equity from their homes just to cover living expenses and pay down credit card debt.
To many homeowners, swapping high-interest-rate credit card debt for a new low-rate mortgage seems like smart money management. And it is for some U.S. households - especially when mortgage interest is tax deductible and credit card interest is not. But it can be bad news for many other households, Silva explains.
Many homeowners are getting cash out of the equity built up in their homes while taking on larger mortgages. That makes households more vulnerable to emergencies like an illness or job loss, when a home's equity can act as a financial cushion of last resort.
Spending cash from equity also perpetuates bad habits by encouraging more consumption based on debt. This is no small matter with the U.S. household savings rate so close to zero.
Swapping unsecured credit card debt for secured mortgage debt is potentially dangerous. If problems arise in paying the new mortgage debt, the lender can seize your home as collateral. Credit card debt, in contrast, is not secured by your home.
When homeowners used the equity in their homes to pay down credit card debt, it was often a temporary reprieve. Silva says credit card debt is starting to rise again as households again start depending on plastic to cover the gap between income and expenses.
Why not just cut expenses? It's a good question, Silva acknowledges. U.S. households are too quick to splurge these days. But declining income and rising costs of basics - from gasoline to health care - are the primary reason for a financial gap now filled by credit card and mortgage debt.
Between 1973 and 2004, homeowners' equity fell from an average of 68.3 percent to 55 percent, the Demos study says. That means Americans own less of their homes than they did in the 1970s and 1980s. Worse, the percentage of monthly income that households must spend to manage monthly debt payments - a key measure of financial stress - is 18.56 percent. That's the highest since data started being collected 25 years ago.
Sound precarious? Sure does to me, especially at the start of a new year in which the Fed seems gung-ho to continue raising interest rates. Those are the same rates that will increase the cost of credit card debt and bump up adjustable-rate mortgages in short order.
In New York this week at a gathering of national retailers, St. Petersburg Times staff writer Mark Albright reports that economists are forecasting a weak year in which the "consumer may be tapped out."
Bingo. That's what happens in the game of Extreme Household Debt.
CASHING OUT
By refinancing, households cashed out $458-billion from homes in four years:
2001: $86-billion
2002: $108-billion
2003: $139-billion
2004: $125-billion
*estimated
Source: Joint Center for Housing Studies, Harvard University, Demos
WHERE DID THE NEWFOUND CASH GO?
Use of money from refinancing, 2001-02:
Repayment of other debts: 51 percent
Home improvements: 43 percent
Consumer expenditures: 25 percent
Stock market, real estate, taxes: 22 percent
NOTE: Percentages add up to more than 100 because some loans used for multiple purposes.
Source: Federal Reserve System
NOT EQUITABLE
Home ownership is up, but homeowner equity is down:
Year Home ownershipEquity as a percentage percent of home
1973 64.4 percent 68.1 percent
1980 65.8 percent 67.5 percent
1990 64.1 percent 61.3 percent
2000 67.7 percent 57.1 percent
2004 69.0 percent 55.0 percent
Source: Federal Reserve System, U.S. Census Bureau
01-31-2005, 11:47 AM
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Here is the full research finding for the statiscally inclined:
http://www.demos-usa.org/pubs/AHouseofCards.pdf
Interesting how people get stuck on this cycle of plundering their assets and become upside down on their mortgages. Foreclosures here we come. Besides me who else is waiting to take advantage of the bubble when it bursts!
http://www.demos-usa.org/pubs/AHouseofCards.pdf
Interesting how people get stuck on this cycle of plundering their assets and become upside down on their mortgages. Foreclosures here we come. Besides me who else is waiting to take advantage of the bubble when it bursts!
01-31-2005, 12:07 PM
#5
Damn, I couldn't wait. I already put my hard earn money back into the real estate market. Fortunately, I have my debt under control.
Unfortunately, some people never learn;( They have to take out equity loans to finance their exotic vacations or buying things that they don't need and can't afford until they go bankrupt.
Clarificaiton of my comments:
"My comments only apply to people who borrow way beyond their means and ablilities in repaying their debts. It is totally cool that you borrow money to do whatever and paying it back eventually. You gotta enjoy life right
"
Unfortunately, some people never learn;( They have to take out equity loans to finance their exotic vacations or buying things that they don't need and can't afford until they go bankrupt.
Clarificaiton of my comments:
"My comments only apply to people who borrow way beyond their means and ablilities in repaying their debts. It is totally cool that you borrow money to do whatever and paying it back eventually. You gotta enjoy life right
"
01-31-2005, 12:22 PM
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i think vacationing while i'm young is more than worth it. i won't be physically able to hike the grand canyon when i retire so why not use the CC a bit to finance a once in a lifetime adventure. too many people get caught up in what's fiscally responsible and forget to have fun. we're only here once and i plan on enjoying my time, especially when i'm physically able to do it.
01-31-2005, 12:35 PM
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Mr J. imagine here in the northeast people overnight loosing 50% of their home value and having to pay for it for the next 30years. They would probably suffer a few heart attacks by the time it would be paid off.
Thomas, you are a 100% correct, people are nuts to spend money they don't have for unneeded things.
If you read the inserted personal story on pg10 in the link I provided it makes you realize what hardships are out there. The story of Gary and Silvia Brown, first starting out by taking a home equity and paying for kids colleges then amounting debt when the family became ill and couldn't keep up with the payments.
I know I would help my kids anyway possible but to take on that much financial strain. Jeez, I would tell them to go to state college and like it. =)
Thomas, you are a 100% correct, people are nuts to spend money they don't have for unneeded things.
If you read the inserted personal story on pg10 in the link I provided it makes you realize what hardships are out there. The story of Gary and Silvia Brown, first starting out by taking a home equity and paying for kids colleges then amounting debt when the family became ill and couldn't keep up with the payments.
I know I would help my kids anyway possible but to take on that much financial strain. Jeez, I would tell them to go to state college and like it. =)
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01-31-2005, 12:42 PM
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therookie, Hey I am not saying you can't enjoy life but to spend $5k on a vacation when you have debt waiting at your doorstep. I don't think that's too smart of a thing to do. I mean at least scale back a little bit. Problem is nowadays people are just spend happy not realizing the consequences. I don't really even blame them. I blame the companies such as the one I am employed with that shove down the throats of unsuspected individuals the type of financial products that do more harm than good. Thats all!
BTW, I am not directing this response to you per se just putting it out there.
BTW, I am not directing this response to you per se just putting it out there.
01-31-2005, 01:18 PM
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Originally Posted by paivag' date='Jan 31 2005, 04:47 PM
Besides me who else is waiting to take advantage of the bubble when it bursts!
