More Bad Advice - Can't Afford Christmas - Hello HELOC

Can't afford Christmas anymore - don't use those credit cards just HELOC it. Don't worry - what is the worst that could happen - oh you could just lose your house, that's all.

Another person not to take advice from - Sarah Dinkins - In this article form the Los Angeles Chronicle she write - Bad Credit HELOCs to pay for Christmas Debt. With gems like -

Usually during Christmas holidays people tend to accumulate debt due to the use of credit cards to purchase goods and services. This debt is repaid along the year with high costs in terms of financing. But if you take a bad credit HELOC and use the money to repay your credit card debt, you´ll get much better terms and more affordable payments with the same flexibility that credit cards provide.

...So, don´t think twice, if you have what it takes to qualify, go ahead and replace your expensive credit card debt with a Bad Credit HELOC and start saving.

I guess she wants company in HELOC Heaven (actually she probably just wants new business leads).

Reward Bad Behavior

I guess we can assume all those that bought with 0% down, used a liar loan or were in HELOC Heaven can get a bonus for there troubles. Bernanke is pushing for banks to help those underwater by reducing the amount of the loans in order to "restore" some equity. Wouldn't one need some equity in the first place to restore it? So I guess this won't include all those 0% downers. We can just give more cash to the HELOCers. Yes, that will solve all the problems.

One of the suggestions Bernanke made was for mortgage and other financial companies to reduce the amount of the loan to provide relief to a struggling owner. "Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding deliquency and foreclosure," Bernanke said.

With low or negative equity in their home, a stressed borrower has less ability -- because there is no home equity to tap -- and less finanical incentive to try to remain in the home, he said.

Bernanke acknowledged this idea might be a tough sell to lenders. Lenders, he said, are reluctant to write down principal. "They said that if they were to write down the prinicipal and house prices were to fall further, they could feel pressured to write down principal again," Bernanke said.

Although this is what he said I have a feeling he really is trying to figure out how to help the lenders but make it look like he is helping the citizens. This is just more of the "privatize the profits, socialize the losses" especially when it comes to big, BIS business mentality that is so often endorsed within our economic system.

Installment Accounts - Credit Cards of the 1920s

This is a bit of a detour from the usual posts - but I have been seeing this pop up at several places. Their seems to be this idea out there that this housing bust is very different from the 1920's - mostly due to the invention of credit cards.

I will not go into the history of usury - that can be googled or wikied. Instead I am going to focus on the rise of credit in the 1920s - the period immediately preceding the Great Depression. While there were not these electronic credit card with magnetic strips that we think of today - there was a huge rise in installment accounts.

There is a great lengthy article which mostly focuses on the Advertising for Installment Plans During the 1920's - but here are some key parts -

Without credit, a customer needed to save enough cash to cover the full price of the car. That was impossible for most Americans. As Olney noted, in order to purchase an automobile with cash during this time period, a typical American family would have to save for almost five years.17 With the spread of credit between 1919 and 1929, the percentage of households buying cars on installment more than tripled, rising from 4.9% to 15.2%.18 The creation of GMAC accounted for a large portion of this increase. In 1925, GMAC was three times larger than its nearest competitor, financing almost half of all installment purchases of automobiles that took place in that year. 19

With this dramatic increase in the installment selling of automobiles came the expansion of this technique into the markets for other major durable goods. According to credit expert Rolf Nugent, the success of automobile installment plans "tended to remove the stigma which installment selling had acquired at the hands of low-grade installment merchants in the 1890s."20 In fact, credit was used in the purchases of up to 90% of major durable goods by the end of the 1920s.21 Average purchases of major durable goods rose from 3.7% of disposable income between 1898 and 1916 to 7.2% between 1922 and 1929. Accompanying this rise in purchases of durables was a drop in the personal savings rate, from 6.4% of disposable income in the former period to 3.8% in the latter.22

So as savings were dropping people were purchasing more and more - more cars and more durable goods. The beginning of keeping up with the Jones. The big difference is that these days people are not just using their credit cards, store cards, and auto payment plans - they are HELOCing the debt as well. Once the credit card is maxed people would just refi or transfer the balance to the HELOC account and then felt free to spend again. After all they were very responsible by "paying off" those credit cards. This time the hole is just a bit deeper.

Grumpy Old Man

Update - Over at Mish's Global Economic Trends there is a better analysis than mine on Secretary Paulson's speech. Mish's post ends with a discussion of Morality Vs. Business Decisions. Here is a great sample of that post -

In a nutshell, banks made business decisions to lend money to people to buy houses that banks knew people could not afford. Banks also made business decisions to lend with no money down. Banks knew there were risk to these strategies but they took the risks anyway.Those were bad business decision for banks. Banks, not taxpayers should pay the price.

Paulson is now begging people to do something that may not be in their best interest to do. My recommendation is simple. If it benefits you to walk away, then walk away.

More advice from the Treasury Secretary today -

First, many in Washington and many financial institutions have been floating proposals for a major government intervention in the housing market, with U.S. taxpayers assuming the costs of the riskiest mortgages. Today, 93 percent of American homeowners � 51 million households - pay their mortgages on time. Many are on tight budgets, sacrificing other things in order to make that payment. Only 2 percent are in foreclosure.

Question - What is up with the missing 5% - are they late on payments and starting the foreclosure process - not technically in foreclosure?

Second, this is a shared responsibility of industry, government and homeowners. We in government are working to expand options through the FHA, and we've worked with the industry to reach as many homeowners as possible to let them know that help is available. There is more that government and industry can do, and our efforts will continue to evolve. Homeowners have responsibilities as well. If borrowers won't ask about solutions, there is only so much that can be done on their behalf.

Someone I think one of the industries that the Paulson won't be working with is the "Walking Away" industry.

Third, the current public discussion often conflates the number of so-called "underwater" homeowners � that is, those with mortgages greater than the value of their house � with projections of foreclosures. Let's be precise: being underwater does not affect your ability to pay your mortgage, nor create a government responsibility for assistance. Homeowners who can afford their mortgage should honor their obligations --- and most do.

Obviously, being underwater is not insignificant to homeowners in that position. But negative equity does not necessarily result in foreclosure. Most people buy homes as a long-term investment, as a place to raise a family and put down roots in a community. Homeowners who can afford their payments and don't have to move, can choose to stay in their house. And let me emphasize, any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator � and one who is not honoring his obligations.

I guess that is a great insult to be called a speculator? And what about peoples other obligations? To their families, themselves and their futures? No one wants to be underwater. Some people will definitely stay as long as they can - their house is a home. However for alot of people a house was not considered a home - it was considered more of an investment. If the vehicle they were supposed to become wealthy with is losing money why drain more money? If you out 0% down you are not losing anything, other than credit issues, by walking away.

We know that speculation increased in recent years; a resulting increase in foreclosures is to be expected and does not warrant any relief. People who speculated and bought investment properties in hot markets should take their losses just like day traders who speculated and bought soaring tech stocks in 2000.

But unlike the day traders who lost their cash - many of these arrangements were made using the house as collateral - so the speculators are giving the properties to the bank and technically upholding their end of the bargain.

He sites how HOPE NOW and the stimulus package will ease the foreclosure burden and help strengthen the overall economy.

Where are they now?

I just read the Fortune Article that was written during the Great Housing Bubble - Riding the Boom. Very interesting article written about what was going on in the West during the bubble. If you have not read or read it years ago have a look. From the authors' tone it seems if they are anticipating the end coming soon and is a bit stunned by the investing they were witnessing. The profiles of the investors were great - very vivid. I would love for them to do a follow-up piece and showcase where the people are now.

Most of the people profiled were still buying up everything in site - site unseen - at what are now the highest point in the bubble. Some had planned to hold the properties for a few years to be able to cash out a the highest - this would be selling time - so I wonder how the people are doing. More Casey Serins? What is the status of the young Trump wannabe who decided to become an investors rather than go to college - and learned all his skills from a cousin during lunch??? What about the investor that really did not seem to understand the money side of the deals - just trusted his sister? What about the woman on the purchase tour that was so anxious to snap up properties and felt that it was a waste of time driving by to actually see her purchases? Were are these people now and what do their property portfolios look like?

These profiles should be reviewed daily when we look to clean up all the havoc wreaked from the Great Housing Bubble.

Explaining the Obvious

This New York Times articles discusses the rise in foreclosures and the relationship to house sales. The areas that had the huge growth during the Great Housing Bubble are now having record number of foreclosures. Additionally in the west - the number of sales is just above the number of foreclosures. Here are some interesting parts of the article -

California led the country in number of properties affected by foreclosure moves, but was only fourth in terms of the percentage of homes affected. Nevada led in that dubious category, with 3.4 percent — or 1 in 30 — of the housing units affected. It was followed by Michigan, which missed out on the housing boom but is playing a large role in the bust, and by Florida, which like Nevada experienced a wave of speculative building amid rapidly rising prices.

The states with the lowest rates of foreclosures tend to be states that missed the boom in housing prices and now have reasonably good economies. In South Dakota, there were only 50 homes involved in foreclosures last year, a minuscule 0.007 percent of homes in the state. Vermont, Maine, West Virginia and North Dakota also turned in rates below 0.1 percent.

So then we can see that all bubbles eventually bust. Here is a copy of the interesting graphs that accompanied the article -