March 24, 2007

A house of cards


I think by now we're all pretty clear on why and how the subprime and Alt-A (liar's loan) house of cards is collapsing.

But I think you should all game this out farther down the road - all the way to seemingly safe 30-year fixed good credit loans, and the fate of the American consumer-driven economy.

Why?

Because Americans stupidly extracted their paper profits, their fake equity, and went on a spending binge the likes we've never seen. And now that fake equity is disappearing.

So many Americans will owe way more than their home is worth, many Americans with ARMs won't be able to make the higher payments, millions of Americans will lose their jobs as housing-ATM consumer driven spending dries up (especially the auto industry), and millions will now lose their homes.

Just game it out. And get ready.

The state of the home mortgage industry is one of the hottest news stories these days. And frankly, it's scaring me.

I'm worried that many folks are headed for financial trouble because they've taken on mortgages that are too large; and I'm scared that others have finally realized it wasn't a good idea to pull out all their home equity.

According to Synergistics Research, 24 percent of homeowners took out a line of home equity credit to buy a car or truck. And 8 percent purchased a vehicle with a second mortgage.

In Sunday's column, "Loan Loser: Home-Financing A Car," I challenged people to stop and do the math before using the borrowed money from their home to purchase a depreciating asset. Too many people just assume that a home equity loan is cheaper than a traditional car loan.

16 comments:

Mort said...

That's okay Keith, they can live in their hummers after they get evicted.

Anonymous said...

In my state you can look up the address of a home and see what loans/liens are on the property.

I was utterly shocked and appalled that EVERY SINGLE house I looked at that was even remotely appealing to me (looking at houses in the $500k-$900k range) had an ADJUSTABLE RATE refi or HELOC taken out in the last 4 or five years. Many of these people are already under water. From what I can tell, if home prices drop more than ten percent in my area, it will be a financial bloodbath. I suspect many will have to sell because their adjustable rates adjust higher (typically written in at 7-10%), or good luck refi-ing a house that's under water.

Give em hell, Kieth

Bill

LauraVella said...

we here at housing panic know that most loans are in trouble, and the subprime domino effect is now snowballing into the biggest forclosure debacle in the history of the world.

But taking yesterday with a friend who bought in 04'said: "everything is fine, homes in the Lafayette area are still selling, seeing sold and pending signs - it's taking a little bit longer, but thats because in winter, people dont buy much".

I do believe homes are still selling, when I went there 2 weeks ago, I was surprised to see sold signs on some of the houses.

These anxious buyers think they are getting a GREAT DEAL right now because prices have dropped 50k....

A good deal (saposed) today, turns into a really bad deal six months from now...

Todd said...

One big difference between a HELOC and an auto loan:

Interest is tax deductible on the former and not on the latter.

That said, I have neither.

Debt-free: T'is the way to be :)

chris g said...

The article is pretty clear that you can save money using a home equity line, but only if you pay the loan off as quickly as you would through auto financing. In this case they used a 5-year loan as an example. But I doubt that a lot of people have the financial discipline to do such a thing, and I bet even fewer people understand how much they would have to pay through a home equity loan each month to get the car paid off in 5 years.

Also, since I work in a field that deals with company bankruptcies, I am pretty sensitive about secured debt. Sure, a car loan is secured against a vehicle, but a home equity loan used to pay off a car is secured against your residence. That doesn't sit too well with me.

Finally, you can get incentives through the dealer that may lower your cost to a rate better than any home equity line, although that's usually through one of the Detroit automakers and less through the Japanese autos. The automaker's finance unit gets a rate that is subsidized through the manufacturer, i.e. the manufacturer helps "buydown" the rate.

My wife is now pregnant so we are going to get her a 2 or 3-year-old Honda CR-V to upgrade from her 1995 Chevy Cavalier. (We are getting another vehicle because the A/C doesn't work and several attempted fixes have been unsuccessful.) I told her to call her credit union first and see what they offered for car loans. The only loans they quoted her were 62-month and 74-month car loans at a rate of about 7%. I told her there's no way we are going above 48 months for a loan, whether through the bank or the dealership.

Cassandra said...

We are so screwed.

24% of new car purchases were HELOCed?

And what happens when mortgage equity extraction ceases?

Did I say we were screwed?

Anonymous said...

How many sheeple will be out buying that SUV or the still overpriced suburban house this weekend? The trickle down effect on the economy will be huge as these beautiful spring weekends turn out little or few buyers.

Anonymous said...

Stupidity and greed must be paid for. There are a lot of people who really need a "hard lesson".

I just hope our "happy face" government or FED does not try to "fix" the problem.

In order to get back to "the way we were" pain must be endured.

My biggest fear is that M3 will balloon and bring down all of us who think our dollars will still be worth something when prices "bottom out".

Americans trying to buy homes will then be competing with Chindians whose currency is worth much more than ours....a world in which American housing is owned by foreigners and we are only able to rent.

America does not have to end this way. Our so-called governmental/corporate leaders have sold America down the toilet for their own short term gains. Left behind will be a ruined country with decaying infrastructure, rampant corruption and crime, and a 3rd world education system that will fuel the downward spiral.

The architects of our destruction...will simply pack up and move somewhere to enjoy their billions.

America has been raped...and we let it happen.

Anonymous said...

Really.

In my model of this scenarios, sub prime defaults wasn't even a factor. Right now that's just serving to confirm the theory that an even bigger problem is coming. The biggest tsunami on the horizon is the wave of ALL mortgages in the last 4 years going underwater and the borrowers walking away from the property. Who will want to pay a 500,000 dollar mortgage on a 250,000 dollar house?

Man sitting on beach looks out at ocean: What's that line on the horizon? Strange. Hey, a bunch of ships out there just got capsized. What is that thing?

Wifey: Oh, it's nothing dear. Have another ham sandwich

Man: Hmmmm. I've never seen anything like that. I'll bet it's bigger than it looks. It's so far away.

Wifey: Take a nap dear.

Man: Is that a tidal wave? No way.

Wifey: You worry too much.

Man: Hey, it's as big as a house! (pun unintended).

Wifey: Oh, tidal waves don't really happen in THIS country.

Man: Yeah I know, but there's one right there! RUN! RUN!!!

So much for parody. Here is a more graphic depiction of "how small a tsunami looks at first".

http://www.asiantsunamivideos.com/Khao-Lak-by-German-Tourist.wmv

Anonymous said...

NEWS FLASH:

I have received an inside scoop that Stewart Title is going to have either massive layoffs, or go out of business.

FYI.

Shakster said...

Speaking of all the cars these FBs bought,not only will I be out sharking a Foreclosure,I will also be Wolf Like in my pursuit of a nice late model used car.I thought I would have to use my Cat Like quickness to nab a deal,but this will be like netting dead FBs in a very large barrel.I also will get great deals on certain auto parts.Thank you FBs,I know the old American addage of Your house is Your Home,but now it's Your house is my home,so get out!Your car is now your home,but just temporarily,cause I will be lookin to snare that tooo.Crackheads.Feel sorry for you?That would be a bad move.So wake the hell up fast, get in touch with your mean side,pin your ears back,and fix yourselves

Down in Oz said...

Yep, borrow money against a depreciating asset to buy an expensive consumer durable. The idiocy of this. Everybody likes to blame one group or another. Well everybody is complicit. there may be a fe victims but for the most part the greed of lenders, the stupidity of borrowers and the ineptitude and corruption of government fueled this insanity. Very, very few real victims here. Think of it as a therpeutic kick in the ass for arogant americans. The french/germans/japanese/Suadies/even we Aussies are loving this. Yeesh, think if grandpa borrowed against the ever appreciating farm in Oklahoma or the ever appreciating and nice midle class german neighborhoods in West Baltimore, East new York, Camdem NJ becuase well real estate always goes up....Bubbles are one thing but people forget that neighborhoods also rise and fall fast. Yesterdays birght inner ring suburb is todays depressing low income rental housing. Many dynamics inplace againt homes being reliable holders of value. Ah, those ignorant of history are doomed to repeat it.........

LauraVella said...

Bill said:"I was utterly shocked and appalled that EVERY SINGLE house I looked at that was even remotely appealing to me (looking at houses in the $500k-$900k range) had an ADJUSTABLE RATE refi or HELOC taken out in the last 4 or five years. Many of these people are already under water".

Bill, I too have kept track of home prices on properties that I like and have been horrified to discover that EVERY SINGLE ONE has either re-fi'd or took out equity to over-improve the home, or go on a shopping spree. I also discovered, even people who bought homes "before the bubble" now have equity loans in addition to their first mortgage. If I am not mistaken, - equity loans are only ADJUSTABLE RATE loans. These loans were cheap back in 02-04', but not now, and they are all going up.

This is why I say that "EVERYONE IS GOING DOWN"-it's not only the re-fi'ers that are in trouble, it's homeowners that bought a long time ago that have been extracting their equity like crazy.

This is much bigger and more wide spread than the dot-com bubble ever was. It's going to be a very bad selling season, and by winter, loans will blow-up time when they convert from fixed to adjustable rates.

LauraVella said...

Anon said:"In my model of this scenarios, sub prime defaults wasn't even a factor. Right now that's just serving to confirm the theory that an even bigger problem is coming. The biggest tsunami on the horizon is the wave of ALL mortgages in the last 4 years going underwater and the borrowers walking away from the property. Who will want to pay a 500,000 dollar mortgage on a 250,000 dollar house"?

Exactly right Anon and well said. This is what I have been saying all along. House prices are way out of proportion to incomes - NO ONE Could QUALIFY FOR A FIXED MORTGAGE, - their payments would be more than their take-home pay, so the LO puts them into a exotic loan product, because even with excellent credit, good just history and a good downpayment, their combined incomes don't even come close to getting them a conventional loan. It's sad, but true.

a.creampuff said...

Overall tighter credit means fewer qualify for prime, as well. Also no first time buyers. That spells additional inventory.

p.s. Spotted this particular wrinkle to the story on Marketplace's web site. Not all MSM is missing the point.

TM said...

"The french/germans/japanese/Suadies/even we Aussies are loving this."

You shouldn't be. Our impending economic doom is going to devastate the world economy. China's hyper-inflated and volatile markets barely survived a rumor of hard times, so just imagine what they'll do when they get splattered by the explosion of the US consumer credit sh*t bomb.

The french and germans will watch as Airbus gets even further trounced by Boeing undercutting them with the advantage of a worthless dollar.

The Saudis can't be happy that their biggest customers are going broke.

And if Australians are loving this, I suppose it must be a "misery loves company" type of thing, what with your own asset bubble and -2.3% average savings rate.