patrick.net

You guys are absolutely not going to believe this but part of the reason I was distracted is when I went to log on this morning I found my desk in a puddle! Yes, a puddle.

Seems my high end, upscale (thankfully rented) condo has sprung a leak! Near as I can figure the gutters are clogged and water is seaping back in under the eaves and into my home office. No big. I just felt obligated to explain. If you notice a sudden lack of posting, assume that I've been electrocuted.

Sorry, wrong link:

http://www.financialsense.com/Market/cpuplava/2006/0809.html

HARM

homeowners with no HELOC have a 0% savings rate

That statement is inconsistent if you accept that paying an amortizing mortgage is a form of forced savings.

I clearly agree, and have stated over and over, that home owners are dissaving at an increasing, and alarming rate. If not for the true-poor, I would also agree that renters are about equal savers to home-owners in this bubble period.

Allah,

Your (and I hesitate to use the term but for lack of a better one) mortgage payment is always paid FIRST! This assures you don't get into arrears etc. What the tutorial doesn't explain is that is that the "equity" you've built up IS NEEDED to implement the next phase of the "buy down". So you do tap into it but it's again needed to put a bigger dent in the 80% part of your mortgage!

Yes, you can tap into it but you'll get monthly statements that will clearly exhibit when you're getting off kilter.

That statement is inconsistent if you accept that paying an amortizing mortgage is a form of forced savings.

I'm sure the article was referring to non-mortgage savings. Even so, what % of new/active mortgages today are still amortizing products? I don't have the national stats handy (it might still be the majority), but it's down to about 20% in California. Add to that the fact that any owner "equity" (in the form of repaid principal) can easily evaporate if prices fall, and you have a very risky, illiquid form of "savings" indeed.

One other thing regarding mortgage accelerator programs:

I've looked at a lot of them, like I say the "me too" firms are coming out of the woodwork. While they do vary somewhat in approach they ALL provide for ongoing mentoring and consulting. This another imortant difference. Unlike the "hit and run" sales we've all been exposed to, this is a long term commitment on the part of the person that sold it to you!

Most, scratch that ALL mortgage lenders we've all had to deal with in the past basically just had you jump through hoops to get the loan and once you did it's like "Oh and good luck paying on that" as you walk out the door.

The rain has subsided so the growing leaks seem "o.k" for now.

CG,

I'm sorry, what was the question again? I'm literally trying to wipe down my desk and computer as we speak, so please make it simple. For MY sake?

I do not how amortizing a mortgage can be considered saving at all. If the "money" cannot be liberated WITHOUT a loan to buy sushi, it is not saving.

HARM

We agree. The problem isn't that people use houses to save. The problem is that has become perverted into a form of future price speculation to fund current consumption, which is very dangerous.

I think well over half of new mortgages in the past couple years are non-amortizing, more so in the bubble areas. These people are _not_ saving at all. They are just gambling by taking money out of the ATM as a credit card cash advance, with the illusion of hitting 00 before they need to cash out.

CG,

Maybe I'm not explaining this correctly. The idea is to have the home paid OFF within 8-10 years, period. At that point one can begin in earnest to look for a 2nd/vacation/retirement home.

Hey I just had a thought! People running around during the bubble buying up these vacation homes before they've even built up any paid equity in their primary residence! How f'd up is that?

@Randy,

Yes! That's what I was trying to get at. There really was no disagreement. "People, what we've got here is failure to communicate..." :-)

Allah, I know you mean well, but please slow down and read more carefully next time.

As far as inflation, that is another story. $100k in savings will buy you less, but $100k in equity will buy you just the same. This is why you have to leave inflation out of the picture when comparing the two.

Huh?

Allah

Your position is clear. Wrong on multiple counts, but clear.

My part in discussing this with you has ended.

If you wish to have a debate I suggest not making leaps and putting words into someone's mouth for the purpose of demonizing them. "It only goes up" is a clear attempt to cast me as a realtor. In a previous debate you openly accused me of being a realtor. Once shame on you. Twice shame on me. Welcome to my RSS filter.

Allah,

The whole point of "owning" a home is in addition to providing shelter it will (Lord willing) one day be paid off, no?

Traditionally, in a "normal" market homes appreciate at inflation PLUS a couple of points. This has been true (up until recently) since before the Civil War. Most of us hope we aren't so far gone that we can't again revisit those norms. You'll have to forgive us if we don't readily dismiss 200+ years of data just b/c of the last 4 years of unprecedented hysteria.

goober,

Yeah I remember Jerry Spence. He would never cut in the financial world especially after the garbage he filled Christopher Darden up with.

"Justice is this baby crying, screaming in a burning building" And you MUST rescue it! (Lotta good that did huh). Try saying that garbage at a shareholders meeting? But I must admit he always looked so cool in his leather tassled jacket from his digs up in WY!

Anyway, the point is, unlike "casinos" these firms are not the actual lenders. We should view them more as "mortgage service firms". They don't like the idea of being a debt slave for "30 to Life" any more than you and I do! Hell, it's their whole marketing strategy.

A better way of saying that is $100k will buy you the same no matter where it comes from, whether it comes from savings, equity, or finding it buried in the wall of you house.

So you are saying equity equals saving?

DinOR, Randy and allah,

My read on these loan products boils down to this - you set up a HELOC that is essentially like a holding account for your paycheck. Any funds you don't spend on normal expenses gets dumped into your mortgage balance. This way, if you are otherwise fiscally undisciplined but generally spend less that you earn net (how many Americans really do this?), this is essentially an automated form of prepayment. Am I correct on this?

If so, here's my question: is the true advantage here that your HELOC balance remains near-zero, so that you don't usually pay any HELOC interest? Otherwise it seems that there is the added burden of paying interest on the HELOC in addition to the "real" principal.

Allah Says:

> Randy, I think I explained myself pretty clearly. I’ll explain
> it in the finest detail I can and anyone who wants to disagree
> or agree with me or even make what I am saying more
> clearer, feel free to chime in.

Randy said:

> Home “equity” is really just a type of savings deposit, which
> will eventually be withdrawn and consumed or invested.

I agree with Randy that home equity is like a savings account, but I would make a change to his statement and write “which might eventually be withdrawn” since it is possible for someone to buy a home (say a little place in the Inner Richmond for $1.3mm that sold for $345K 10 years ago) with a 20% cash down payment, pay down the loan every month and still die years from now without a penny of equity. I think that Allah’s point is that if I put $260K in to FDIC insured CDs I will always have at least $260K, while if I buy a home and put down $260K I may not have any equity in 5 years even after 60 months of forced “savings” with a fully amortizing loan…

My read on these loan products boils down to this - you set up a HELOC that is essentially like a holding account for your paycheck.

Two things:

1) Can a HELOC be revoked?
2) What to do when the HELOC floating rate becomes higher than the fixed mortgage rate?

Speaking of home equity, it looks like the vultures are starting to circle in Boston:

http://business.bostonherald.com/realestateNews/view.bg?articleid=165149

"Housing market ‘upside down’ : More homes selling below purchase price"

And in a real estate market where home values are declining, it’s leaving some people who are trying to sell their homes facing a jam. Home owners whose mortgage covers most of the original purchase may walk away from a sale owing the bank a big chunk of change.

After heading to the West Coast and the Midwest in search of business, she returned, and suggests Boston looks like a fertile market once again.

I think that Allah’s point is that if I put $260K in to FDIC insured CDs I will always have at least $260K

Er... did you mean at least 100K?

Speaking of home equity, it looks like the vultures are starting to circle in Boston

If I were those vultures I would take a rest now. Why should I keep circling when my prey is becoming MORE dead by the minute?

goober Says:

> I know jack about economics, banking, investing,
> real estate, etc…..
> BUT!! This old dude told me once after I explained
> to him how I could win at craps. He said “They
> didn’t build those casinos with the money you won.”
> I think lenders are even more evil than casinos.

Lenders (including credit card companies) are like casinos in that they try and make as much money as possible.

Lenders have a lot of great products that help a lot of people manage their finances like free checking, interest free float on purchases and low cost loans.

Casinos have many things to help you pass the time in Tahoe or Vegas such as free drinks, free cover band lounge acts and low cost buffet diners.

Just because some people are stupid and borrow more than they can afford or gamble more than they can afford does not make the lenders or casinos “evil”…

FAB

Your assessment is consistent with what I was saying. The point is that any asset, be it cash, a home, stocks, whatever, are valued by their respective markets. The catch is they are all priced in dollars, yet even dollars change in value.

Your example is a great one about how someone could lose their savings using a home as a savings vehicle, timed perfectly wrong. I'd point out that an equal amount invested in CDs during much of the 70s, and then cashed out before Volcker, would have also lost tremendous value, while the same amount in a home during that period would have held its ground.

Actually, this is the root of all the discussions about gold, foreign currency, int'l growth funds, etc. as alternative savings vehicles.

And, as a definition, *people* can not invest. All individual "investment" is just a form of savings. That's simply because people aren't businesses, and cannot sell their equity. I have yet to see someone successfully sell stock equity on themselves (although David Bowie did sell some nice bonds).

Okay guys - here's what I think - these mortgages are working in the UK, but over there you can't walk away from your houses so easy and just hand the keys back - you're still liable for any difference in equity when they sell it.

So, are you saying that if you had a normal mortgage and it went negative equity you straight away walk away from it?

The idea is that every penny extra on a daily basis lodged with your account means less daily interest, but as payments go out for other stuff, your balance varies, but you do save interest overall - plus you don't pay tax on interest as you aren't earning any - just saving it. Now, in the UK if you have a mortgage for say 60,000, you can pretty much guarantee that with interest that would be (over the life of the loan) - 120,000 on a normal loan. Maybe the banks are banking on you not saving like you should - but if you do - then this plan should work out.

People are taking out refi's to pay for their mortgages.

If this is widespread, the tide of foreclosure is coming very soon.

I wonder how many of them have unknowingly waived their non-recourse protection.

So, are you saying that if you had a normal mortgage and it went negative equity you straight away walk away from it?

It is very possible. Not that people want to. But I think there will be more and more of that.

Spurred by higher interest rates on their adjustable mortgages and home equity loans, many homeowners are refinancing their mortgages — and taking out bigger loans in the process.

Hmm, people are super-sizing their loans when interest rate is higher. Very interesting.

What is non recourse protection if I may ask? Or is that a dumb question

http://en.wikipedia.org/wiki/Nonrecourse_debt

skibum,

That's basically it! Because the deposits are deployed to pay down the HELOC (if you will) that is paid off in about 30 months. Not 15+ years as is the standard and then applied to the "80" % side of the loan. Each successive "HELOC" is paid off a little quicker until your entire loan is paid.

The fellow that got much of this started Chris Michael George, thus CMG originally brought this to B of A, Wamu, Wells etc. They basically showed him the door b/c they felt it's the BANKS that should be taking advantage of these deposits NOT the borrowers! That's how CMG came to be affiliated w/GMAC. As a credit card company this meant being able to grow their business (not taking away from it). I just got off the phone w/their sales coordinator and verified this.

Bottom line is that equity is unpredictable and shouldn’t be regarded as a sure thing.

But what is a surely predictable thing in today's world?

Well maybe these loans are being offered because people will have more of a stake in the property - i.e. they are trying to pay it off quicker - so they are less of a default risk?

One thing that was learnt in the UK was that if you had negative equity (10,000 - 20,000 back then), if you held on long enough, the property went back up in value - but then the house prices were not so out of whack then and even now they are nothing compared to the Californian figures.

$100k in savings will always be $100k, even if it eventually only buys you a hot dog!

Money is money only because of its purchasing power. The number on a piece of green paper signifies nothing if it cannot be exchanged for goods or services.

Allah,

Are you a "player" or is a Les Paul just the first thing that came to mind?

Peter P

It is interesting to note, for our discussions on behavioral finance/economics how firmly ingrained the idea of a "nominal dollar" is. So heavily in much of this "debate" that one side has effectively decided to just ignore inflation as irrelevant, because he really doesn't understand it as a mechanism of relative PPP value.

skibum,

I'm going to create a new acronym to save time in the future:

SSOTW (Sob Story of the Week) I can't take it any more!

And did you get a load of their "advice"? How about this for advice? When your freaking home sells THEN go "shopping"! They tried to play us cheap by saying "If you have to stay in a hotel room". What's this? WTF is this? I guess they didn't want to use the "R" word. Sheesh.

Max,

I did hear someone else say that this Xmas may be the "last hurrah". I'm sure it is. FB's would do well to get plenty of warm coats and all the things that make living in a Suburban you know.......comfy.

Allah,

I've played (some might say "pretended" to play) guitar since I was 11. No, I don't have any delusions of "getting the band back together"!

@DinOR,

Yeah, the "advice" to sell first, THEN buy is priceless. Almost as good as them saying, if you want to sell, think like a buyer when you price it: a nice way to say, LOWER YOUR PRICE!!

Ok, I gather what Allah's basically saying is that homeowner equity (any deposit + repaid principal) --unlike an FDIC-insured savings account, CD or Treasury-- is exposed to TWO kinds of wealth destruction risks:

1. Nominal wealth destruction, mainly in the form of falling house prices (which can quickly wipe out the owner's equity).
2. Real wealth destruction, mainly in the form of stagnant or falling house prices, while the cost of other goods (and wages) slowly goes up.

An FDIC-insured savings account, CD or Treasury is only exposed to ONE of those risks: #2. In addition to this comparative disadvantage, house equity is also inherently illiquid compared to other forms of "savings". It is also uniquely sandbagged with liabilities (the mortgage balance owed + house maintenance, taxes etc.) that a T-Bill, CD or savings account holder does not have to deal with.

So... (please follow me here), you can view repaid mortgage principal as a form of "forced savings", but it's a relatively risky, undiversified and illiquid type of savings --especially right now.

Is this fair? Does this definition satisfy everyone? Can we move on to discussing the pros & cons of mortgage accelerator plans now?