azcentral.com
People rushing for loans on equity
Glen Creno
The Arizona Republic
July 22, 2001
It's a ready trove of cash and it's right there in the family room, the
bedrooms, the garage. Why not spend it?
That's the attitude many consumers are taking about the equity in
their homes. More of them are tapping a resource that once seemed
untouchable to pay off credit cards, buy cars or jet off to Hawaii.
Properly used, home-equity loans or credit lines are a handy tool in
a financial crunch. But experts say that too many consumers are
taking big financial risks borrowing against their homes just so they
can keep spending.
The numbers bear out the trend. Total U.S. home-equity debt
outstanding rose to $753 billion last year from $277 billion in 1992,
according to SMR Research in Hackettstown, N.J. That included a
stunning 25 percent leap last year.
Individual loan amounts have jumped, too. The Consumer Bankers
Association says that equity-loan balances averaged $24,100 in
1997 and hit $34,000 last year. The average balance on credit lines
increased to $31,000 last year, though the banking group noted
most consumers use just 60 percent of the line.
"The money's too easy. It's been an era of extremely easy money,"
said Dan Ray, editor of Bankrate.com, a financial site based in North
Palm Beach, Fla.
The loans look like a painless way out, but marketplace whims can
load a negligent borrower with sudden and intolerable debt. A job
loss, medical emergency, spike in interest rates or a tailspin in
home values can turn that easy home-equity payment into a
fearsome obligation.
The ultimate cost: Loss of a house.
"These loans might work in an up economy where you have a job,
you're getting raises, house values are going up, increasing your
equity. But if any of the legs on that stool crumble, there goes your
house," Ray said.
Part of what's driving the popularity of equity loans is consumers'
desire to consolidate credit-card debt at lower rates. Or spend more
and deduct the loan interest from income tax.
Home-equity rates run higher than first mortgages but some are tied
to marketplace rates that are heading lower now as the Federal
Reserve continues cutting.
Aggressive lenders are pushing the business, too, enticing
consumers with loans that offer more than a house's value and
bombarding television and mailboxes with easy-out consolidation
pitches. Jay Butler, director of Arizona State University's Real
Estate Center, says he gets at least one a day by phone and jokes
that, "If it wasn't for the home equity offers, the mailman would never
stop."
Butler sees a fundamental shift in the way homeowners view their
houses. In the past, the goal was to retire the mortgage as quickly
as possible and live payment-free. Thrifty homeowners who'd lived
through the Depression or a world war tapped their home's equity
only for emergencies.
"People viewed the equity in their home as sort of sacrosanct,"
Butler said. "They had a mortgage, paid it down, then burned it."
Now, the house is just another asset to be leveraged to best
advantage, Butler said. The shift comes from a heightened
sophistication, or at least more aggressive management of money,
on the part of homeowners. And because of frequent job shifts,
divorce and more singles owning homes, these owners are much
less likely to stay put in one place for their entire lives.
"People learned the home is part of their investment portfolio, and
they just live in it," Butler said.
But these sophisticated investors can outsmart themselves,
especially those looking for home equity to rescue them from
frantically juggling credit card balances. Kim McGrigg, Consumer
Credit Counseling Services Southwest spokeswoman, said that too
often people who've wiped out credit card debt look at those empty
balances and start spending again.
"You are simply moving your debt," she said. "You're not changing
your lifestyle. You cannot borrow your way out of financial trouble.
It's looked at as a quick fix, and it absolutely is not."
Bankers defend their home-equity lending practices. Fritz Elmendorf,
of the Virginia-based Consumer Bankers Association, notes that the
loan marketplace is extremely competitive and institutions are
jostling hard for customers who want easy and convenient loan
applications, quick approvals and rate competition.
"The issue is: Are some consumers getting in over their heads? It
really comes down to consumers being able to responsibly handle
the credit. The industry's own interests are in line with the
consumers and keeping people from becoming overextended.
There's no advantage to getting people into too much debt," he said.
McGrigg said consumers need to learn how to run their money
rather than leaping for the nearest safety net when the can't pay their
bills. But many consumers don't know how and aren't willing to
learn.
"Budgeting is a word like dieting," she said. "It just has such a
negative connotation to it. . . . They don't teach budgeting in
schools. A lot of people's parents don't talk to them about money.
So where are we learning about money? Unfortunately, many of us
are learning from our mistakes."
Reach the reporter at glen.creno@arizonarepublic.com or
(602) 444-8972.
KJC |
