Have we learned nothing? HELOC rant

[disneysteve]

There is a series of TV ads running in my area from one of the banks pushing Home Equity Lines of Credit. They are, to me at least, just as irresponsible as the ones that helped lead to the whole housing mess. The ads encourage people to borrow against their home equity to pay for things like remodeling their kitchen or paying college tuition for their kids - basically, trying to get people back to the routine of using their homes as personal ATMs. We all know how successful that was over the past few years. I'm sure there are a lot of people who, given the chance, would seriously reconsider the HELOCs they took out.

The sad thing is that I'm sure many of the people who aren't upside down on their mortgages will jump at the chance to spend their equity having learned absolutely zilch from recent events.

[jIM_Ohio]

HELOCs for home improvements makes sense
using it for cash which is spent on consumables makes no sense

[littleroc02us]

I personally believe that a good majority of this country hasn't learned a thing about the mistakes that were made and were lucky the Gov't bailed them out. (IMO it is called, oh whats the term "enabling") Just watch, greed will soon take over again and the consumers will get themselves in debt and make bad decisions. Helocs are a terrible idea always! I'm sorry to be such a conservative, but if you have to borrow against your house to improve it, then you can't afford it in the first place. What a stupid idea. I'm going to borrow against my house, which could go down in value and put everything at risk to improve my house. Try saving????? Every house improvement project we have done has been with cash. There isn't any risk in that.

[disneysteve]

While I am not 100% debt-averse like Dave Ramsey, I do think people borrow for a lot of things that they shouldn't be borrowing for. People have largely "forgotten" how to save up for what they want. They want to get the stuff first and pay later rather than save first and get the stuff later. If you roof is leaking and the only way you can afford to fix it is to borrow, so be it. But if you know you want to remodel your bathroom at some point, you should be saving for it each month and do the job when you have enough money set aside. If you can afford the payments on the HELOC, you can afford to save that same money each month toward your goal.

[nick__45]

The worst part is that banks are pushing people to refi. They want that refi fee. What makes me mad is that people with ARM is actually paying a lot lower now and their matured rate may set at lower rate than those taking out a fixed. I never really understand ARM rate. It seems like anyone taking one out in the last 8 years can't loose because rate has been steadily lowered. So why are people blaming ARM for their demise?

[nick__45]

I personally believe that a good majority of this country haven't learned a thing about the mistakes that were made and were lucky the Gov't bailed them out. (IMO is called, oh whats the term "enabling") Just watch, greed will soon take over again and the consumers will again get themselves in debt and make bad decisions. Helocs are a terrible idea always! I'm sorry to be such a conservative, but if you have to borrow against your house to improve it, then you can't afford it in the first place. What a stupid idea. I'm going to borrow against my house, which could go down in value and put everything at risk to improve my house. Try saving????? Every house improvement project we have done has been with cash. There isn't any risk in that.

For most things, Americans have very short term memory unless someone in authority tells us what to think. For example, Karl Rove and Dick Cheney are now being labeled national heroes on fauxnews. But my friend who caught his captain stealing supplies was dishonorably discharge through false accusation can't own a gun, which is a violation of his right.

[cjscully]

The worst part is that banks are pushing people to refi. They want that refi fee.

That's their business. Make no mistake - the banks want everyone indebted to them. That's how they make their money. That's why they want everyone to use their credit cards all the time for everything, that's why they push refi's, etc... A liability to the bank on your balance sheet is an asset on theirs.

What makes me mad is that people with ARM is actually paying a lot lower now and their matured rate may set at lower rate than those taking out a fixed. I never really understand ARM rate. It seems like anyone taking one out in the last 8 years can't loose because rate has been steadily lowered. So why are people blaming ARM for their demise?

ARMs have always been a double-edged sword. I could probably write pages and pages on this subject. If rates go down, they're a good thing. If rates go up, they're a bad thing, unless used strategically in very specific scenarios. Problem is none of us are very good at predicting the future.

[jpg7n16]

So why are people blaming ARM for their demise?

Because people will blame anyone or anything they can to avoid looking into the real reason why they're broke:

Themselves.


It wasn't that they bought too much house, and couldn't afford it - it was that the interest rates changed on them. Nevermind that they knew the rates would change when they bought it. Nevermind the disclosures they signed saying they understood the risk of rates going up. It wasn't their fault, it was the banks. Or the economy. Or Bush. Or Obama.

Insert any reason you can, as long as it's not me.

[littleroc02us]

Because people will blame anyone or anything they can to avoid looking into the real reason why they're broke:

Themselves.


It wasn't that they bought too much house, and couldn't afford it - it was that the interest rates changed on them. Nevermind that they knew the rates would change when they bought it. Nevermind the disclosures they signed saying they understood the risk of rates going up. It wasn't their fault, it was the banks. Or the economy. Or Bush. Or Obama.

Insert any reason you can, as long as it's not me.

You just said everything I feel.

[bjl584]

That's the trouble with the instant gratification mindset that most people have. They don't want to save up over the next several years so they can remodel their house. They want to do it now and just make payments on it for the next several years. If you are a responsible person, then I don't have a problem with it. Trouble is, too many people out there aren't responsible. They just act on their impulses and worry about how to pay for it later.

[greenskeeper]

can they still borrow 120% of the value of the house like in the good old days? LOL

[fe2o3ez]

As cjscully mentions, we could write pages on ARMs. What was not properly sold to these people - or what they did not take the time to find out - is that an ARM requires a certain flexibility in one's finances. The shorter the ARM, the more flexible you need to be. If the rate goes down to a point that you are comfortable with, you need to have some money ready to refinance and lock in the low rate. If the rate goes up, you need to have given yourself enough time to wait it out for them to come back down, or you need your finances to be flexible enough to absorb the extra interest on top of the current payment.

That's where everyone got **messed up**. They were seduced by super low interest loans on 3 or 5 year ARMS, at a time when the long-term fixed interest rate was not very predictable. Hence when the time came that the ARM expired, 2 things happened. 1. Nobody could afford to pay the higher interest and 2. everyone tried to get out of the higher interest loans and flooded the market with homes. Add in the 'know-it-now media' that jumps on every story like a starving dog, and the economic markets panicked. As more came to light about the loans, others that hadn't fulfilled their ARM term realized the bad deal and tried to get out too. And the spiral continued to go down and down...

or something like that. Knowledge is power, and until this all went down, nobody took the time to find out enough about their loans.

[disneysteve]

That's where everyone got **messed up**. They were seduced by super low interest loans on 3 or 5 year ARMS, at a time when the long-term fixed interest rate was not very predictable. Hence when the time came that the ARM expired, 2 things happened. 1. Nobody could afford to pay the higher interest and 2. everyone tried to get out of the higher interest loans and flooded the market with homes.

The other thing that happened is that housing values plummeted so when the ARM expired, people couldn't refinance if they wanted to because they were upside down on the loan. No lender would even talk to them. People bought into the concept that values only go up so that when the ARM ended, they'd have a lot more equity and be able to refi into a fixed rate loan.

[cjscully]

The other thing that happened is that housing values plummeted so when the ARM expired, people couldn't refinance if they wanted to because they were upside down on the loan. No lender would even talk to them. People bought into the concept that values only go up so that when the ARM ended, they'd have a lot more equity and be able to refi into a fixed rate loan.

Irresponsibility again. Anyone who cared to look would have known that bubble was going to burst. If you actually read the disclosures on an ARM you would have to ask certain questions before you sign. If you purchase a home on an ARM, you need to know what the rate cap is on your loan and you need to figure out whether or not you can still afford the payment if the rate caps. Most didn't bother with that step. Along with the purchases, many people borrowed every penny of equity they had in their homes with ARMS. They should have paused and said, "What if..." The ones that did are probably in okay shape now. Those that didn't are the ones who got into trouble.

[jpg7n16]

Irresponsibility again. Anyone who cared to look would have known that bubble was going to burst.

While I'm all for taking personal resposibility for your decisions (see post above) - I think this is an unfair accusation.

This is far too easy to say looking back after the fact. It would have been much different before it all happened.

I do absolutely agree that people should have asked many more "what if" questions, but it is too much to ask people to predict the future.

Here's an interesting thought:
If you truly knew that the housing bubble would burst, why didn't you sell your own home, rent for a while, and then buy it back when the values fell??

Because although you must consider both the upside and downside in your decision (as was the failure of many people), you cannot know in advance which eventuality will actually happen.

If people considered and accounted for the downside, the impact would have been substantially less.
If people knew the downside was coming, no one anywhere should have bought a home. Even if it was well within their budget, or paid for in cash - it'd be foolish to buy.