Sunday, December 04, 2005

Homes Used In 'Vicious Cycle' Of Debt: Study

The Orlando Sentinel reports on how households are using home equity in their revolving credit. "The growing use of credit and credit cards in America has changed the way we look at money, manage our debts and handle our mortgages. It has even changed the way we look at our homes. A new national study shows that more people are making mortgage payments with their credit cards and are using their homes as checking accounts, according to Ellen Schloemer."

"'One out of three households reported using credit cards to cover basic living expenses on average four months in the last year,' the study says, adding that this includes 'rent, mortgage payments, groceries, utilities or insurance because they did not have money in their checking or savings account.'"

"Schloemer says the study does not show the exact number of people who put mortgage payments on their credit cards. 'This is the first study of its kind. We are looking at new patterns. One of the things that was striking about it was the number of people who were using their credit cards to pay off their mortgage and their home equity to pay off their credit cards.'"

"The study shows that credit-card debt 'has almost tripled since 1989, and has risen 31 percent in the last five years, with Americans now owing close to $800 billion in credit-card debt.' Americans cashed out $333 billion in home equity between 2001 and 2003 in an attempt to free up much-needed cash, and '"40 percent of homeowners had refinanced during the last three years, with over half using the proceeds to pay off credit-card debt,' the report adds."

"A vicious credit cycle traps more Americans, Schloemer says. 'When life gets tough, money becomes tight, and the bank account dwindles, we use credit cards to live on. Then, we refinance our homes to get the cash to pay them off, and then we do it again.'"

"If you fall behind on your credit-card payments, it's hard for a lender to repossess what you bought: gasoline, meals, clothing and so on. But if you fall behind on payments on a loan where your house serves as collateral on a secured loan, the lender can take the home."

"But housing prices can only climb so high, so fast, and sometimes they decline. So homeowners who don't rethink their spending and borrowing patterns risk losing their castle and their capital. 'We have a saying at the office,' Schloemer says. 'Your home is not an ATM. You cannot continue to take cash out of it, because at some point home values are not going to go up enough to let you do so.'"


At 12:50 PM, Blogger Chip said...

I think this is what a lot of sorta-bears are overlooking. I believe there is a large herd out there that is ready to turn on pretty short notice, like a school of fish.

At 6:08 PM, Blogger SLO renter said...

Scary stuff. I overheard a couple arranging what sounded like a home equity credit line when I was at the bank this weekend. The couple looked to be of an age when retirement planning becomes serious. I don't know what their plans were for the money, but they were talking about taking out what sounded like a very large sum. I hope they do not end up with regrets.

At 12:22 PM, Blogger GetStucco said...

Luckily home prices never decline in value, so this "vicious cycle" is merely a hypothetical concern for Chicken Littles to stew about ;-)


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