Little by little, millions of Americans surrendered equity in their homes in recent years. Lulled by good times, they borrowed — sometimes heavily — against the roofs over their heads.
Now the bill is coming due. As the housing market spirals downward, home equity loans, which turn home sweet home into cash sweet cash, are becoming the next flash point in the mortgage crisis.
Americans owe a staggering $1.1 trillion on home equity loans — and banks are increasingly worried they may not get some of that money back.
To get it, many lenders are taking the extraordinary step of preventing some people from selling their homes or refinancing their mortgages unless they pay off all or part of their home equity loans first. In the past, when home prices were not falling, lenders did not resort to these measures.
Such tactics are impeding efforts by policy makers to help struggling homeowners get easier terms on their mortgages and stem the rising tide of foreclosures. But at a time when each day seems to bring more bad news for the financial industry, lenders defend the hard-nosed maneuvers as a way to keep their own losses from deepening.
It is a remarkable turnabout for the many Americans who have come to regard a home as an A.T.M. with three bedrooms and 1.5 baths. When times were good, they borrowed against their homes to pay for all sorts of things, from new cars to college educations to a home theater.
Lenders also encouraged many aspiring homeowners to take out not one but two mortgages simultaneously — ordinary ones plus “piggyback” loans — to avoid putting any cash down.
The result is a nation that only half-owns its homes. While homeownership climbed to record heights in recent years, home equity — the value of the properties minus the mortgages against them — has fallen below 50 percent for the first time, according to the Federal Reserve.
Lenders holding first mortgages get first dibs on borrowers’ cash or on the homes should people fall behind on their payments. Banks that made home equity loans are second in line. This arrangement sometimes pits one lender against another.
When borrowers default on their mortgages, lenders foreclose and sell the homes to recoup their money. But when homes sell for less than the value of their mortgages and home equity loans — a situation known as a short sale — lenders with first liens must be compensated fully before holders of second or third liens get a dime.
In other words, when homeowners have to choose between paying the first mortgage and the second, the first one has priority. And with the number of mortgageholders (I'm not about to call people who bought a $500,000 POS with a no money down mortgage for $500,000 and other $50,000 to remodel the kitchen "homeowners") already sitting on first mortgage balances in excess of what their homes are now worth, the equity lenders are going to get hosed. And thats where things get really interesting.
It's no secret anymore that the consumer binge of the last eight years wasn't done via increased income for most Americans, it was all done with the hot checks of easy credit. Why pay taxable interest on a loan for that fifty grand SUV when you can borrow on your house? Why just replace the countertops and the floor when you can take out a loan for seventy-five grand and gut the whole damn thing? Why just take an ordinary mortgage when you can get a couple of piggyback loans, knock the thing down, and build a big ugly box out of particle board and vinyl that extends to within 8' of the property line and blocks the sun from your neighbor's house but has a bigass chandelier overhanging the "bridal staircase"?
When I was a kid, my parents used to talk about the dream of going from a $25,000 house to a $30,000 house, the latter of which maybe had an extra bath and a pool in the backyard. They knew that such things were probably just a dream, out of financial range for people like them. People like my family drove Dodge Darts and Ford Falcons, while only rich people drove Cadillacs and Mercedes and BMWs.
Then the 1980's came along, and people watched Lifestyles of the Rich and Famous on television and got this idea in their heads that they could have everything that rich people had, even if they had to go into hock up to their eyeballs to get it. You could drive a luxury car by leasing it. You could have that extra bathroom by taking out an equity loan. You could have the trappings of the rich -- the bigass entry foyer with the chandelier, and the luxury cars and the multiple garages and the vacations in St. Barths -- and the fact that the rich could buy this stuff out of ready cash while ordinary Americans had to go into hock to do it never occurred to people.
And so the debt culture was born. Creative forms of debt allowed ordinary Americans to kid themselves that they were gaining entry into "the club" -- and now they too could look down on the poor and the "welfare queens", because those above them on the economic ladder were opening the doors and saying, "Come on in! The free lobster buffet is straight ahead on the right." Except that there was no free lobster buffet, and the debt culture was designed not to enrich the lives of the middle class, but to anesthetize it to what was really going on -- a massive transfer of real wealth to the richest Americans, hidden by the debt being made available to the middle class.
And now the bills are coming due and Americans are only now realizing that the free lobster buffet is off limits to them. But instead of blaming the people who made the debt available and helped them get in over their heads, they're still pointing their fingers down the economic ladder and preparing to elect another Republican president who will continue to screw them over seven ways to Sunday until there's no more blood that can be wrung from the dry stone that used to be middle class life in America.
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