Shore like those HELOCs

A frightening article in today's Asbury Park Press today about borrowers using their house to get cash. Owners in Monmouth and Ocean are taking taking all the equity out of their properties. From the article -

Monmouth and Ocean counties led the nation last year in the percentage of borrowers extracting cash from their houses, usually through refinancing or home equity loans.

A staggering seven out of 10 high-risk borrowers in both counties — those with low credit scores — refinanced loans to obtain extra cash, Federal Reserve data for the end of 2007 showed. Those are the highest percentages in the nation among large counties with more than 2,000 subprime loans. New Jersey had five counties in the top 25.

Such mortgage debt will continue to weaken the housing market at the Shore and around New Jersey this year, experts and consumer advocates say.

The shore may end up hurting the most, next to the sub-prime city neighborhoods. With disposable income becoming less available people will spend less time at the shore resort towns and spend less money when they do visit. The hour-long lines outside of seaside restaurants will be shorter. Summer rentals will have to lower prices and may have more openings. That along with the possible job cuts in Atlantic City will make things worse.

"It's no secret that we live in a credit-dependent society," said Brett Lopes, vice president of Intercounty Mortgage in Hazlet. "In the same way that people don't handle credit cards correctly, they perceived their house was worth more and more and they used it like a credit card."

Consumer advocates and regulators also contend many lenders did not properly vet borrowers, lending money to people who never should have obtained loans.

Nationally, more than half of subprime borrowing — 54 percent — was a result of cash-out refinancing. Subprime loans carry higher interest rates and are usually given to people with weak credit histories.

So many people who already have money problems yet they decided to take every last cent out of their property. Since we know that some lender allowed people to take out upto 120% of their equity many people were already in trouble during the Great Housing Bubble. Now that the bubble is deflating, more and more people who were barely making it are now underwater.

Forty percent of the 10,800 subprime loans provided to homeowners in Monmouth and Ocean counties were given without full documentation of income, and the average credit score was about 610, far below the top score of 850.

Many of these people combined liar loans with suicide loans - a lethal combination. Remember liar loans, AKA stated-income loans, are the type of loan used when a borrower could not qualify for a loan based on their real income. And the suicide loans, AKA Option ARM or Negative Amortization loan, are they type of loans where the principal grows with each payment. Putting people underwater each month at a rate they never could afford in the first place.

Forty percent of subprime borrowers at the Shore are also behind on their loan payments. Eleven percent are in foreclosure.

Hopefully the shore will not face the same devastation as one reads about taking place in Arizona and California.

Marvin Smith, an economist with the Federal Reserve Bank of Philadelphia, said new research shows that many subprime borrowers who now face foreclosure previously had good credit and lower-rate mortgage loans.

They had run into financial difficulty — either with credit cards or medical bills — and then they tried to use their house to consolidate the debt and bail themselves out, Smith said.

"In some cases, when someone ends up in foreclosure, they refinanced more than once," Smith said. "They were trying to stay ahead of the curve."

Smith said it is not usually advisable for homeowners to use mortgages to pay off credit card debt because the debtor pays more over the life of the loan.

In addition, the homeowners run a great risk of foreclosure if they continue to run up credit card debt, he said.

This is the debt spiral. It takes alot of knowledge and discipline to change these habits. Just cutting off the spigots will not solve the problems, it may actually be making things worse. Also remember that during the bubble many banks and lenders were encouraging people to pay off their credit cards with their home equity.

... Congress and President Bush continue to wrangle over details of proposed bailout packages that could cost upwards of $40 billion.

U.S. Sen. Robert Menendez, D-N.J., has proposed a bill to expand federal grants to credit counseling agencies. In New Jersey, state Sen. Ronald Rice, D-Essex, has proposed a bill that would require lenders to pay a $2,000 fee when they begin foreclosure proceedings. The money would be used to fund credit-counseling agencies.

P.G. Waxman, a Lakewood real estate broker who has tried to help troubled homeowners sell their houses, said he now believes homeowners with weak credit should undergo mandatory financial counseling before they obtain a mortgage.

The credit and finance counseling are probably better proposals than bailouts. People need to learn how to live within or under their means. As a society we have to encourage this behavior rather than encouraging massive debt. It is like the old Chinese proverb - "Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime." We need to give ourselves a financial lessons and counseling to understand how these things work. People need the tools and skills to understand the impact of their financial decisions.