Friday, August 15, 2008

Second Mortgage = Bad, HELOC = Good

Home equity does sound significantly better than "second mortgage." And the acronym HELOC sounds even better yet. "Second mortgage" sounds like a weight around ones neck - HELOC sounds like freedom. Both through word choice and how we think about them. Mortgage bad, equity line good.

Today there is an excellent article form The New York Times debt trap series titled Home Equity Frenzy Was a Bank Ad Come True. If you want to skip the graphics, page scrolls and a one page version of the same article can be found here.

There is a lot to this article and the snippets here just go into a small part of it. Definitely worth the read to anyone interested in the recent explosion and changing mindset regarding equity withdrawal. Lets take a look -

Since the early 1980s, the value of home equity loans outstanding has ballooned to more than $1 trillion from $1 billion, and nearly a quarter of Americans with first mortgages have them. That explosive growth has been a boon for banks. Banks’ returns on fixed-rate home equity loans and lines of credit, which are the most popular, are 25 percent to 50 percent higher than returns on consumer loans over all, with much of that premium coming from relatively high fees.

However, what has been a highly lucrative business for banks has become a disaster for many borrowers, who are falling behind on their payments at near record levels and could lose their homes.

None of this would have been possible without a conscious effort by lenders, who have spent billions of dollars in advertising to change the language of home loans and with it Americans’ attitudes toward debt.

“Calling it a ‘second mortgage,’ that’s like hocking your house,” said Pei-Yuan Chia, a former vice chairman at Citicorp who oversaw the bank’s consumer business in the 1980s and 1990s. “But call it ‘equity access,’ and it sounds more innocent.”

As a result, the United States has become a nation of half-home owners. For the first time since World War II, the portion of home value that Americans own has fallen to less than 50 percent. In the 1980s, that figure was 70 percent.

Over a billion dollars was invested in advertising to change our views on debt. Slogans proclaiming people who utilized their equity as "brilliant" came about. Second mortgages had bad connotations - such as increased debt to the bank. But a equity line illustrated one using money trapped by their house. It was your money and who knew how to spend it better than you.

This passage from the article focusing on the great Elizabeth Warren sums it up best -

Still, Elizabeth Warren, a professor at Harvard Law School who has studied consumer debt and bankruptcy, said that financial companies used advertising to foster the idea that it is good, even smart, to borrow money.

“That ‘unused home equity in your house? Put it to work for you.’ ” Professor Warren said, mimicking the ads. “Doesn’t that sound financially sophisticated?” Not to Professor Warren. “Put it to work,” she said, is just a euphemism for borrowing.

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