More Equity Lines Closing

The San Francisco Chronicle has an article about high-end homes that are losing their equity lines due to the falling home prices. The article features the owner of a million dollar plus property - but by California standards that is not really that much. The million dollar property became almost as ubiquitous as the Coach bag during the Great Housing Bubble.

Now lets look at the article -

To all appearances, [Brent Meyers'] is an unlikely victim. A well-paid chief executive of a small consulting firm, he owns a substantial investment portfolio and a million-dollar house in Moraga. He pays his bills on time and has no credit card debt. His credit score, he says, is around 800, a rating more or less in the stratosphere.

But in mid-March, Bank of America cut off his home equity credit line of a little more than $180,000, citing a decline in the value of his property. Meyers, 40, is now scrambling to come up with $75,000 to pay for a major landscaping project and is canceling other big spending plans.

The amount of money people were spending during the bubble was almost as amazing as where the money was being spent. The idea of having unused or inaccessible equity in a house became unfathomable. People felt that their equity is their money, which they should be able to use now. It was just over a decade ago where many areas of the country had little growth. But sometime within the last 10 years people somehow assumed the double-digit growth rates in housing prices would never stop. When Meyers used the $180,000 left in his line would he just refinance or take out another HELOC to spend on new things and new projects.

... Borrowed money pays for everything from new outfits at the clothing store to house purchases and major home improvement projects.

...Households, which gorged themselves on easy credit for most of the past decade, are bearing the brunt of lender caution. In a wide variety of consumer loan categories, particularly those backed by real estate, lenders are cutting back on loan amounts, charging higher interest and stiffening qualifications.

More and more people were borrowing to live a more extravagant lifestyle than they could afford. One's home became a high paying second income. A home was viewed as an investment or ATM, being a place to live was secondary. Living well beyond ones means became both accepted and expected.

Take home equity loans. In the past decade, borrowing against the value of their homes became the money source of choice for homeowners who wanted large sums to pay for such items as home improvements, college tuition or luxury spending.

By 2004, Americans were taking out $180.5 billion in home equity loans, according to the Federal Reserve. Much of that cash was pumped right back into the economy, buying cars and furniture, renovated bathrooms and kitchens, airline tickets and hotel rooms.

Numerous industries grew astronomically during the bubble. Restaurants and nail salons popped up everywhere. Working class stay at home moms were driving new BMW's. People regularly took extravagant vacations - trips that were once considered once in a lifetime became commonplace. Around northern New Jersey landscapers became the norm - why mow the grass yourself when you can get your exercise at the health club.

... But as home prices started to sink, homeowners had less equity to draw on. Lenders including Bank of America, Washington Mutual and Countrywide Financial cut back on home equity loans to reduce their exposure to the housing market.

... Cutbacks in home equity loans and other forms of consumer credit are one of the factors behind a stall in retail spending.

Between losing access to easy debt and prices of food and gas increasing people have little extra money for other things. Cutbacks are getting more and more commonplace - not by choice but by circumstance.

Warren Leiber, (landscaping contractor)... estimates that 80 percent of his clients used home equity loans or mortgage refinancings to pay for his services.

... When Meyers took out the credit line in November 2006, his home was valued at $1.475 million. With less than $1 million in principal outstanding on his first mortgage, he had a comfortable equity cushion to cover the line.

A few weeks ago, Meyers got a letter from Bank of America informing him that the line had been suspended in its entirety. When he called to ask why, he was told that his house had dropped to an estimated $1.09 million in value, which left insufficient equity to cover the line.

More evidence that people saw home equity as easy money. The HELOC was viewed as accessing what is yours - not credit or debt. Having numerous mortgages at the same time was also quite common. It is also common to read about people needing to take out a HELOC to pay their mortgage - talk about circular debt.

... "I'm going to change my spending behavior because I lost access to $180,000," [Meyers] said. "We're going to be deferring other expenditures to build a pot of money to replace what Bank of America took away."

It was not a pot of money - it was a line of credit. Sometime during the last decade people did not realize they were not the same thing. Equity in the house was considered cash in the bank. Who needs to save money - just take out more equity from the house.

... Wages are growing too slowly to keep up with rapidly rising prices, particularly those for necessities such as food and fuel. Homes and stock portfolios are dropping in value. Many people feel they're falling behind. And they can't borrow easily to fill the gap.

That witch's brew - stagnant incomes, rising prices, evaporating wealth and reduced access to credit - is fostering a fundamental change in attitude and behavior, economists say.

Credit became confused with money. Equity became confused with income. People thought because they had access to money they had money - it was access to debt and the debt finally caught up to us.

... In essence, the borrow-and-spend game that sustained American households - and boosted economic growth - reached its limit. By the fourth quarter of 2007, households devoted a record 14.2 percent of their incomes just to service debt, according to the Federal Reserve.

For every dollar someone makes more than 14 cents goes just to service our debt. That is money spent yesterday being taken away from what it can be used for today or tomorrow.

That "record debt servicing burden is affecting people's ability to feed their families, make their utility bills and to discharge their health and education responsibilities," Merrill Lynch economist David Rosenberg wrote in a recent report.

... As home prices soared in the middle of the decade, consumers tapped the rising value of their property as a source of cash by refinancing first mortgages or taking out home equity loans. But in 2007, as home prices fell and foreclosures skyrocketed, lenders turned wary of the housing market. Home equity lending volume fell sharply in 2007, tumbling to $60.5 billion. By the last three months of the year, such lending slowed to an annual rate of $26 billion.

We are now paying the price for living off debt not work or income. Unfortunately some are paying a much bigger price than others. Some were conned and some were gullible. But these problems will reverberate throughout our country.