Lessons learned? Lenders still pitching refinancing

Good piece in today's Los Angeles Times reporting that big lenders are still aggressively pitching home refinancing: "Despite the mortgage meltdown, the blizzard of advertising for home loans continues. With the sub-prime market in tatters in the wake of record defaults and foreclosures, fewer pitches scream 'Bad credit? No problem!' Instead, lenders struggling to remain profitable now are targeting people who have good credit and plenty of home equity."

Countrywide Financial is a big player: "David Sambol, Countrywide's president, told financial analysts Friday ... 'There remains a very large stock of home equity that has not yet been tapped -- greater than $10 trillion -- which can be tapped to finance home improvements and other expenditures, such as education investment, small-business development and retirement spending.' "

Our take: One of the reasons this real estate downturn threatens to do unusually widespread damage to the overall economy is the refinancing boom. Even some buyers who bought their houses a decade ago, and should in theory be sitting on a small mountain of equity, are finding themselves in default and foreclosure. Why? Where did their cushion, that mountain of equity, go? They borrowed against it. Again, and again, and again.  The refinancing boom has distorted economic activity in ways policy-makers seem to be ignoring: In the recent past, it pumped up economic activity with spending growth that could not be justified based on income growth; and now, not only is much of that extra economic activity drying up, but refinancing has put at risk homeowners who should in theory have a cushion against a housing downturn.

Your thoughts? Comments? E-mail story tips to lalandblog@yahoo.com.

Comments

[Sue]

The lenders still trying to suck home equity out of people - it's like that kids joke.

Person A: Don't move, there's a brain sucking spider on your head?!
Person B: What?!
Person A: What's it doing?

Person A inspects person B's head

Person A: It's starving!

[Michael Snyder]

Where I come from it's called, "Bettin' the ranch." and it's considered an activity for drunkards and fools. Conventional wisdom dictates home ownership as key to building wealth and if you're gonna have a "stake" you may as well be able to hang your hat on it. The lenders plaintive drum beating seeking out the folks who had the wisdom to hang on to their equity is further evidence of their desperation. Underwrite a loan for a first time buyer; any buyer without nearly thirty percent equity? Not on a bet. What about renegotiating some of those loans they've got to know are going to implode? Who out their can even get a top tier buyer's purchase past the appraisal process on the first try?
As the SEC roast Angelo Mozilo in his tanning booth; the lenders need to stop acting like predators and start acting as partners in the home ownership process. Lacking that it's likely gonna be a long cold winter.

[anon1137]

"There remains a very large stock of home equity that has not yet been tapped -- greater than $10 trillion -- . . . "

And do they arrive at that $10T figure using 2007 valuations? What happens when 2010 comes around and all these owners who refi this year are underwater. Sounds like Countrywide is very busy getting the next wave of foreclosures ready.

[Rich]

Given the nature of this blog, where real estate agents, mortgage brokers, big lenders, and stubborn sellers are all the universally agreed bad guys, it doesn't surprise me that people are automatically piling on with the premise that refinancing must be bad if these guys like it. But I'm going to beg to differ--easy refinancing allowed the little guy for the first time in history to actually tap into the equity of their homes to meet other needs. Those of you who are old enough need to think back to the early 60's, perhaps when some of you were young married couples struggling to get started. Could you get a credit card back then? Not unless you were one of the "Mad Men" types with big incomes. Mortgage? not unless you had 20% up front. Personal loan? Not unless you were a customer of the bank with fat savings account. The consumer had no ready sources of cash for life's needs and no means to tap into the one thing many did have, the equity in their home.

So while it's an easy thing to abuse, the availability of refinancing is a major liberation of the working person's right to tap into the assets they have and make use of the marketplace. Many have used this freedom to correct old problems like old credit card debt, or new possibilities like owning rv's, or worthy plans like paying for the kid's college. This is one area where, while some will fail and suffer bad consequences, the rest of us need to not lose our right to avail ourselves of the opportunity to tap into our equity if our needs call for it...

[Randy Adams]

You're joking, right? You always had the "right" to tap into your equity. It's called "selling your house." AND then you don't pay interest for exercising your "right."

[Rich]

"Selling your house"???

Listen, Randy, can you possibly do a little THINKING before you actually zip off your comment? Selling your house in order to get at your equity is the hardest, least feasible option. You have to identify another, cheaper house to buy, or a rental, and you have to go through all the expenses which eat significantly away at your equity, especially realtor's commission and points. (Remember points? In the '60's, all home buyers had to pay them). For most homeowners refinancing is the best possible way to tap into their equity--no realtor commissions, no having to move, no loss of quality of life by living in a cheaper house, no impossible down payments. Why shouldn't working people have the right to do that if they're creditworthy? Marketplaces supposedly work best when there aren't artificial restrictions, so why shouldn't refinancing be an option for those who can safely do it?

[sheila]

i can see rich's point. just because credit is available, that doesn't mean it's a wise or feasible choice for everyone. donuts are also available but to an obese diabetic with a heart condition and a wheat allergy, they could be deadly. is the solution to ban donuts and credit or to EDUCATE people about how money works and to ENFORCE fair dealing and disclosure in lending?

admittedly, my parents, not my schools, taught me how government and finances work, but maybe it's time that schools stepped in and started teaching more "life skills" so people can make good choices. i have mentioned before that i have personal knowledge of "sweatshop" operations which intentionally targeted homeowners with lower education levels, minorities, and people who have made mistakes with their money in the past, and did a "hard sell" on them for re-fis. no accountability, just close at all costs...

it seems like, at a minimum, there could be some sort of mandatory educational process in place for certain borrowers who are considering putting their house at risk? you can't save people from themselves, but making the facts available and accessible would allow people to choose with their eyes open. even fast food joints have to provide detailed nutritional information...

[ProblemWithCaring]

"But I'm going to beg to differ--easy refinancing allowed the little guy for the first time in history to actually tap into the equity of their homes to meet other needs."
Posted by: Rich

I am definitely no boomer, but isn't the myth supposed to be that "back in the 1960s" people were sage enough to understand that if you were lucky enough to see your home increase in value, then the $3,000 in "equity" was to be realized upon your sale of it, and not something that should be used to finance the purchase of avocado-colored appliances, go-go boots and Vespas? For Hippies and Squares, wasn't debt still something to be avoided?

From an American policy standpoint, an appetite for debt-spending was not there in 1960. So, I guess I am asking: the desire for the credit-fueled lifestyle we see today -this "easy refinancing allowed the little guy" - was a widespread social sentiment in 1960?

Personally, I have wondered whether America's current proclivity to debt was another waste product of Boomer narcissism.

[Pete Viles]

Rich wrote, "...it doesn't surprise me that people are automatically piling on with the premise that refinancing must be bad if these guys like it. But I'm going to beg to differ--easy refinancing allowed the little guy for the first time in history to actually tap into the equity of their homes to meet other needs."

Thanks, Rich. Let me clarify: I'm not saying refinancing is bad; I'm saying that it's never been as widespread as it has been recently, and it's one of the factors that is likely to magnify the current real estate downturn. If you listen to politicians and policy-makers talk about the mortgage crisis, it's clear that most of them do not understand the impact that refinancing has played. They talk about the foreclosure crisis as if every loan going bad is a purchase loan. We know that's not true. Quite a few people had affordable loans on affordable houses, but they borrowed against their equity until they had unaffordable loans on unaffordable houses. This is one of the reasons that it's not particularly helpful to look at the last real estate downturn for guidance on how this one will play out. In a typical downturn, homeowners at risk are those who recently purchased, and are at risk of being underwater. In this downturn, because of widespread refinancing, you have a much larger group of potentially at-risk homeowners.

In addition to all that, the refinancing craze has made the consumer economy look artificially healthy. It has allowed millions to live beyond their income temporarily, by borrowing against equity. It's deficit spending in the consumer economy -- and we know that deficit spending boosts the economy. Temporarily.

[are they crazy]

Rich: Used to be most people lived within their means and didn't try to be something they're not. Most didn't attain their identity of self worth by showing their money - that was considered bad taste. Most didn't consider a home an ATM - the goal was to pay off the house. Using credit and filing bankruptcy were considered a failure and embarrassment. Most young couples knew they would need to save for a down payment and buy what they could afford. I'm not sure I understand what benefit you are seeing. It doesn't look to me as if people are happier - the seem more rushed, more stressed, less healthy and angrier. There's more addiction, whether it is drugs, alcohol, internet, TV, or using shopping for entertainment. Houses and cars are much bigger and less energy efficient. People have become slaves to their jobs and possessions. I doubt many used their equity to start businesses or give to charity. What good has the easy money done for the average family?

[MyLessThanPrimeBeef]

ProblemWithCare, it sounded like you wrote the book called 'Debt Surfing - the Road to Serfdom?'

[MyLessThanPrimeBeef]

Are they crazy, I see you have not tried to date any shallow beauties here in LA.

[are they crazy]

Hey PrIme: It's not the location it's the character. I'm a born and bread LA girl - from a better part of the westside, but lack that shallow gene. Of course, I got out of there and lived a variety of other places. People are so different when you get out of CA. I'm amazed when I go back east or to the midwest outside the biggest cities. It's like traveling to a foreign land. The people are nice and seem to be more content, more substantial and real. People actually look their real age and don't seem to mind it. The also don't seem to mind that they aren't nouveau riche.