Silver Lining on Home Equity Loans

Citizen Wealth Financial Justice

New Orleans In some ways we all eventually come to grips with the fact that we are a “product of our raising,” as the expression down here goes and in the case of personal real estate and personal debts, I was my father’s son:  conservative!  When he retired after 38 years with an oil company, the first thing he did was pay off his mortgage.  When I left a job I had held for 38 years, I paid off my mortgage.  Land is an asset.  Pay the notes and hold the land as long as you can. Save, don’t spend, was another part of the standard operating procedure. I know a lot of people who took out home equity loans to pay for this, that, and the other, especially children’s educations.  I saved for it, and am still paying off the last $10,000 on the last of my children’s student loans.  What did I know?  I was the chicken, and it now sounds like my friends, and a lot of big whoops, may have been the foxes!

A front page article in the Times while I was off the grid in talking about home equity loans says it plainly:  “…one of the paradoxes of the recession:  the more money you borrowed, the less likely you will have to pay up.”

The banks are writing off these home equity loans at record levels and the default rate on such loans, given the collapse of housing prices in many markets, is busting the charts compared to other default rates.  In 2009 lenders wrote off $19.9 billion in home equity loans and in the first quarter of 2010 wrote off $7.88 billion in such loans.  It goes without saying that big bank balance sheets are probably carrying untold billions of dollars in bad loans that they are sequencing for write-offs in the future that are probably uncollectible but still on the books.  When any collection is made, it seems little more than 10 cents on the dollar is being collected.  The article quoted a Utah collection outfit plainly stating that anything more than $10-15,000 was simply uncollectable.


The plain math for this weird mix of tragedy and opportunity is that if someone pulled out $100,000 or so in Arizona, California, Florida or wherever when the market value of their homes was soaring, then they might end up losing their home because they are underwater (though as I have counseled previously, in many cases their economic self-interest is already better from walking away rather than paying forever to never achieve equity), but they would have pocketed $90,000 free and clear.  Bigger whoops with million dollar places might end up walking away with two, three, five times that amount.

Before the crying towel gets pulled out for the banks, remember that the default rate is still less than 5% and falling slightly, so it’s not like there aren’t a lot of chickens like me and fewer foxes out there, but don’t talk about “moral hazard,” because in this bubble the banks and the borrowers were co-dependents all the way up, and now, all the way down