Sunday, January 07, 2007

nobody put a gun to their heads



I've been wanting to use this picture for a while.

I've been thinking of the exuberance with which people have been taking out their rapidly increasing (but illusionary) home equity (particlarly in the US) to buy frivolities like Hummers, plasma TV's, hideous granite counter tops and Cancun holidays, etc. How could they? It blows my mind. Like any debt, the bank can call it at any time - though they tend not to as long as you make your payments. But what if they did?

What if you are sitting in front of your plasma TV, on your new Italian leather couch, looking out the window at your shiny Hummer, and you get a call from Human Resources telling you that you will be laid off in 2 weeks? Then a piece comes on the news saying the party is over, and housing prices are crashing. That $200K HELOC is going to look pretty scary - especially since your Hummer depreciated 30% as soon as you drove it off the lot.

Someone wrote a while ago (I think at VHB) about how in their parents' day it was shameful to take out a second mortgage on one's home. Are not HELOC's less secure than 2nd mortgages? Or is it just another way of expressing it?

Will all of those upside down on their mortgages look to the gov't to bail them out? Or will they just have to "suck it up"? After all, no one put a gun to their heads...

I won't shed any tears for them,or gloat, but I will put in a low-ball offer on their house.

16 comments:

Uncertain Buyer said...

Guilty, I fell for that trap. I bought a new car with it and quickly started regretting it. All I could think of was how I was paying interest on money that was mine. All this on a depreciating asset that I really coudn't afford on a standard loan.

If it was for an emergency then I could justify it.

I sleep much better at night not worrying about the increasing interest rate on my variable HELOC.

Uncertain Buyer said...

The HELOC in my case was a second mortgage.

Uncertain Buyer said...

Oh yeah, I forgot to say I Sold the new car and bought a used one. Yes, I did take a hit. But was able to pay off the Loan which made it worth while.

Lesson learned.

patiently waiting said...

Keeping oneself from abusing credit (or emptying savings) is a daily struggle for all of us in these times. My credit limit keeps getting increased and I'm constantly getting low-interest credit card cheques with my statements. Not to mention the low-interest on savings. We really could use a lot of things, including replacing some very worn-out furniture, but we have resisted so far. Its not easy.

patriotz said...

Keeping oneself from abusing credit (or emptying savings) is a daily struggle for all of us in these times

Not for this guy. Haven't carried a credit card balance for over 20 years.

Can't people understand that borrowing money for consumption makes you worse off? You can actually buy more things if you pay cash. It's about something called interest.

bc_cele said...

I really have to shake my head at how things have change so quickly. I remember how I was doing financial planning back in the early 90's and when someone was in need of a consolidation loan, I would tell them that if they had enough equity in their homes (at this time it was more than 30% of the appraised value) then they could re-negotiate their mortage and have the balance of their other loans tacked on. At this time, people had never even thought of this option.

Of course, these days there is no way I'd even suggest it because things are just way too different. People are now too aware that they can do this and banks are willing to loan up to far more than 70% of the houses value. Worse, at that time, most people only used consolidation loans to clean up their debt. These days, it seems that a consolidation loan is only a way to get more debt.

It sort of reminds me of watching dogs eat. If you go away and put out one days food, they eat it in one day. If on the other hand, you leave out three days food, they'll eat that in one day.

Freako said...

"It sort of reminds me of watching dogs eat."

Yep. Squirrels they ain't. Dogs I mean.

mohican said...

"The HELOC in my case was a second mortgage"

A HELOC is by definition related to the equity in the house and thus is a 2nd mortgage as it imposes a lien against the property. Mortgage def: a conveyance of an interest in property as security for the repayment of money borrowed.

A HELOC is a mortgage with a catchy name and some interesting payment options that makes it sound and look like something different than a 'mortgage.'

Most people do not understand these basic facts despite being told about them by their financial institution. They are in too much of a hurry to have access to the money. The level of ignorance with which most people treat their finances is astonshing.

noturaveragebear said...

I never use cash. Always credit cards. This way I control my spending as I have receipts for all purchases. I go thru them each month. Also I pay later and make the extra ten cents or whatever the interest comes to. But I have never not paid in full at the end of the month. Don't understand how people can't pay off their credit cards.

Real estute said...

Whatever happened to the common phrase "I'm saving up for that..."?
Does anybody save for anything these days?

bc_cele said...

noturaveragebear said...
I never use cash. Always credit cards. This way I control my spending as I have receipts for all purchases. I go thru them each month. Also I pay later and make the extra ten cents or whatever the interest comes to. But I have never not paid in full at the end of the month. Don't understand how people can't pay off their credit cards.


I'd say, it's because most people's math skills and impulse control are somewhere between totally nil and that of a crack-addicted monkey.

It seems that few people realize that you can pick up the phone, or use the Internet to get your up-to-date balance, then all you have to do is subtract this from your monthly take home pay. When it hits zero, you have no money left.

Simple, I know, but seems to confuse the majority of the population.

mohican said...

Does anyone save up for anything these days?

http://tinyurl.com/ycma9u

wannaget2calgary said...

Whatever happened to the common phrase "I'm saving up for that..."?

I believe the traditional form of this phrase is "saving for a rainy day".

Sadly, this well-known phrase has become a source of confusion for many of the current consumer generation, who have come to believe that you must spend all of your savings each time it rains.

It is easy to imagine the impact of the misunderstood "saving for a rainy day" belief system on those misguided souls who have grown up on the rainy west coast.

solipsist said...

Thanks for your comments all, and thanks for the link mohican. Steve Martin is a funny guy, too bad SNL isn't around with the old crew - Gilda Radner, Belushi, etc.

bc_cele said...

wannaget2calgary said...
I believe the traditional form of this phrase is "saving for a rainy day".


Yes, that's the phrase, and that just may be the reason for the problem here in BC - it's always raining. ;-)

wannaget2calgary said...

mohican said " ... http://tinyurl.com/ycma9u ..."

That Steve Martin clip is too funny. My wife was busy working while I played it and she suddenly started laughing. It made me think of at least a few members of our family who are always broke.