... While tighter lending standards have cut off all but the most credit-worthy borrowers from auto loans and home loans, many people are turning to credit cards and tapping more of their home-equity lines of credit to dig themselves in deeper. And lenders, once eager to lend to those with even spotty credit records, are trying to rein in borrowing by cutting consumers' available credit lines.
The one most interesting thing about raiding the HELOC is that it is harder to foreclose on the property if the first mortgage is being paid. This is one of the reasons that lenders are cancelling credit lines for homes with less than 80% equity. So people are trying to grab it and hope they survive the current economic turbulence.
... Borrowing is climbing quickest in the regions where house prices plunged most sharply, making it tougher for people to extract money in cash-out refinancings. (In a cash-out refinancing, a homeowner pays off a mortgage by taking out a loan that is larger than the original mortgage and then pocketing the difference.) Credit-card balances rose nearly 15% during the first quarter from a year earlier in California and Florida and more than 20% in Nevada -- all states caught up in the housing bust, according to Equifax and Economy.com.
These regions have been hit so hard - and it has reverberated throughout the local economies that people need to get money from somewhere. I am just afraid in another year or two we will see record bankruptcies in these areas. People are already underwater in many areas.
The rise in borrowing shows just how addicted the U.S. consumer has become to credit. Even as borrowers are cut off in one area, they promptly look for new sources. Workers have increasingly been raiding their 401(k) plans to take out loans over the past year, according to plan administrators and nonprofit groups.
Now, mortgage brokers say some clients are calling them in a panic, worried that their bank will freeze their home-equity lines. Deborah McNaughton, president of Legacy Financial Services Inc., a mortgage lender in Placentia, Calif., says several of her clients have recently borrowed more from their home-equity lines of credit and stashed the money in bank savings accounts. Theresa Leick of San Juan Capistrano, Calif., a loan processor who works with Ms. McNaughton, pulled $21,000 from her available home-equity line of credit in February to park in a certificate of deposit.
"I'm fattening my reserves in case I have to go look for more work," says the 40-year-old Ms. Leick, who says she is concerned about losing her income because she works in the mortgage business. She says she would have preferred not to have tapped her home-equity line, "but if the bank takes away my comfort zone, that will make me lose sleep at night."
People are so addicted to their credit lines. Worse yet so many view their equity as accessible cash. This is a pretty new phenomenon. Taking your 401K to pay your debt is basically taking from your future to pay for your past. Although when you see your account plummet by over 10% it probably would feel better if you used the money than having your account manager lose it. And taking your equity line - especially a home equity that may be affordable now with low rates there is a huge discrepancy between the interest rate received on the line and the interest one is paying to borrow the money. Since a HELOC usually has a variable interest rate these will shoot up sooner or later.
... Credit counselors say they have started seeing more people turn to their credit cards to cover everyday items. "Food, fuel and medicine -- people are charging their day care, even their tithes to church, and any incidental items," says Gail Cunningham, a spokeswoman for the National Foundation for Credit Counseling in Silver Spring, Md.
... In a separate survey released last week, Discover said 52% of consumers it surveyed in March expected to spend more in April on household basics by cutting back on discretionary expenses, such as vacations, or by setting aside less money for savings and investing. That is an increase of 12 percentage points from its February survey and close to the highs seen last November, when gas prices spiked.
With everyday needs skyrocketing - gas and food seem to be going up every week - it is costing people more with just the basics. Vacations, eating out and other extras get pushed back not by choice but by necessity in order to meet daily living requirements.
...Earlier this year, J. Hwang of Fort Lee, N.J., tried to refinance the 7% rate he was paying on his mortgage but couldn't qualify because his bank was now requiring him to hold more equity in his home. Instead, he decided to take advantage of some credit cards' 0% balance-transfer offers and borrowed roughly $45,000 to pay down the balance on his home-equity line of credit.
Mr. Hwang's strategy: Since he won't have to pay any interest on the credit cards for about a year, he figures he will be able to save roughly $2,000 that he would have otherwise had to pay on his home-equity line of credit. Instead, he plans to use the savings to pay down the principal on his mortgage. "I didn't want to give my bank another penny for interest," says the 30-year-old health-care worker.
This sounds like he knows what he is doing - but he is really just juggling his debt and can easily get into more trouble playing this game than just dealing with reality. We are going to hear about more and more people trying to game the system and having it back-fire. It happened to all of the 100% finance, no money down, and interest only home buyers. They also tried to play the system and lost.
For the past several years, William Jordan, president of Sentinel Group Inc., a financial-planning and wealth-management firm in Laguna Hills, Calif., has been advising clients to pull equity of their homes and put the money into safe, liquid accounts so they have access to the money. He recently advised one of his clients, Matilda Compean of La Mirada, Calif., to refinance her mortgage and take out cash after she was having trouble making ends meet.
The 54-year-old client-services manager began working extra hours last fall to help pay for higher household expenses, such as gas, and to save money to buy a car for her daughter, who had recently totaled her car in an auto accident. So, in January, she refinanced her mortgage and pulled out $60,000 in equity to purchase the automobile and set aside an emergency cash cushion. Doing so, says Ms. Compean, "just gave me a lot of room to breathe. I was at my wit's end. I just kept thinking things would get better."
People are paying this guy to get them underwater. She can not pay her bills now so she thinks having an extra $60,000 debt will make things easier. Another sad case of someone using their HELOC to pay their mortgage and keep up their present lifestyle. I wonder if the liquid accounts that Mr. Jordan recommend are run by his firm. Ms. Compean sounds like she is already living close to the financial edge - I just hope Jordan did not push her off the financial cliff.
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