Proficient Note Buyers
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December 10, 2007
Mortgages as ATMs...who knew???
A story on CNN's website today paints a grim picture of how far overboard some Americans went when it came to their home equity positions. We've all know a neighbor, friend, or co-worker who took out a home equity loan and build an addition, added a pool, or re-did the kitchen. You may have even done that yourself, and why not? It was likely seen as a good investment at the time.

Now, however, as home prices fall nationwide, more and more people are finding they owe more than their homes are worth. The banks and mortgage companies that allowed homeowners to use their houses as mega-ATM's are now knocking on the door with their collective hands held out, palms up. What came as a surprise to me is all the OTHER purchases that were being made using equity as the collateral. Cars, all-terrain vehicles, vacations, Christmas presents...(Christmas presents???!!!)

Call me old-fashioned, but I grew up in a "if you can't pay cash for it, you shouldn't be buying it" household. Debt is something my father always cautioned against, especially if you have nothing to show for it when payment comes due. I remember seeing a news story a few years ago when the Philadelphia Eagles went to the Super Bowl. Fans were taking out home equity loans just for the chance to see their team in the big game. Sure, they had memories (of a Super Bowl loss, no less), but that was likely small consolation when they wrote the first of many many checks to pay off that trip.

Of course, there wouldn't be debt if it wasn't good for someone. The issuers of these home equity lines of credit got sucked into the myth that property values would continue rising indefinitely and saw the chance to earn a high rate of interest, all the while still being well collateralized. The consumers got sucked into thinking they could have even more things they didn't need, essentially paid for by "free money", courtesy of their home. Well, we all know how that's working out. I guess there was a whole lot more wisdom in my father's words than I originally gave him credit for...


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