When they said money was "on the house," they didn't mean this

A NYTimes story in yesterday’s paper (click here!) talks about the trillions of dollars that eveyone borrowed in home equity loans during the boom times.

Remember all the ads that said “Want a vacation? Put it on the house!” and it is no coincidence that the phrase “on the house,” denotes “free” in your mind. That’s precisely what they wanted you to think. The discovery that you had to pay it back was supposed to come later.

Interestingly enough, according to the article, now “free” is the meaning that is becoming true. Second mortgages are going unpaid in increasing numbers, and homeowners are threatning the banks with default if the bank doesn’t let them alone.

Which means all the junk they bought with those home equity loans — cars, vacations, ipods, dental work, the wife’s new boogs, whatever — really will be, ultimately, free.

Not really free, of course. All that money, by not being repaid, is souring the credit markets, making other loans harder to come by. Because the loans were back by value in homes that has now disappeared, it is going to be impossible to get it back. Banks are showing profits, but with less money to loan floating around, the economy as a whole will suffer.

Which means unemployment stays high and all the rest.

It also means that you and I who saved up money and bought things, and paid our debts, are once again being played for saps.

If it were up to me, I’d demand the banks go after every one of these deadbeats hammer and tongs — a national lesson that you can borrow, not pay back, and suffer no consequences, is a very bad lesson indeed. The sight of a few of them living on the curb might scare the rest into more responsible fiscal practices and then the nation as a whole will be better off.

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5 Responses to When they said money was "on the house," they didn't mean this

  1. Bob Becker says:

    Yeah, but if they do go after them hammer and tongs, they will walk away from their mortgages, which means more repossessions, more defaults, more problems for the housing markets, higher unemployment, etc. etc. Problems either way. It seems like a Catch-22 the banks have created for themselves. Or as Oliver used to put it to Stan, “Here’s another fine mess you’ve gotten us into!” to me.

    I have a hard time believing, though, that a great many people were fooled by advertising into thinking borrowing against your home’s equity meant free money. Most of those who did it and now can’t pay were foolish, spendthrifts, etc… but not fooled by advertising.

    The phrase the bankers threw at us when property values began to rise significantly was “take money out of your house for… well, for whatever you want to use it for.” English translation: “increase the size of your mortgage by borrowing more.” I find it hard to believe people agreed to that without understanding they were in fact borrowing more and increasing their debt when they “took money out of their house.”

  2. CB says:

    No one can really be surprised by this. As many, including Charlie, have pointed out, “Go shopping!” is the war cry of our time. No more living small, no more saving up for what we want – we have a patriotic duty to be consumers. It’s completely ingrained in our culture to spend and spend, and when we run out of money, we borrow, so that we can spend some more. Gotta have the latest gadget, gotta have the best car…

    Yesterday on the radio I heard a couple of ads for mortgage loans too – “Want to remodel? Want to take that vacation? Want something you haven’t got a dime for? Do it the easy way and call our mortgage company…”

    So this problem is just the spending coming home to roost… living in an unsustainable way has to end some time – it’s a shame that it always has to end with a crisis situation that hurts everyone.

  3. Bob Becker says:

    CB:

    While I generally agree, I’d carve out an exception for people who took out second mortgages or refinanced and took money out to pay for medical care, operations, etc. they could not otherwise afford. If I had a wife or child facing some dread disease and in need of expensive medical care to live, I’d take out a second mortgage for every dime I could if I had no other way to pay for their care. And there are people across the country who find themselves in that kind of bind. I think the largest single cause of personal bankruptcy in the country is medical bankruptcy.

    So while we’re leveling justified criticism at the free-spenders on borrowed cash they couldn’t afford to borrow, I’d exempt those driven by life-saving medical costs they could not pay any other way.

  4. CB says:

    I agree Bob, there are exceptions. I was really only talking about taking out second mortgages for non-essential purposes… I’d say that getting needed medical attention falls into a different category.

    There is a whole other discussion in the observation that people have had to take out second mortgages to pay for life-saving surgeries and medical care but I’m baking banana bread right now and don’t wanna get into that… LOL.

  5. laytonian says:

    …and here’s where it all went wrong:

    Our economy is based on consumer spending, and the housing bubble was based on people increasingly “investing” in homes — with Bush’s “ownership society” the latest push.

    Since homebuilding couldn’t be outsourced to China, it was the one thing that kept people employed: contractors, tradesmen, big box home stores, furniture, Crap China Decorating Stuff Inc and THE BIG GIANT CHEAP CLOCK required of all McMansions.

    As the market cooled, mortgages got easier to obtain, via the subprime market and resulting derivatives.

    First-time buyers had starter homes with granite (radon-emitting) countertops, stainless steel appliances, stonework, the required stucco AND “lots of rooflines because it looks more expensive”.
    THEN….if you didn’t have a “fresh” mortgage (ie, if you had equity or no mortgage at all), you were bombarded with the “on the house” home equity offers.

    AND…it made so much sense to some, to take out home equity loans for that car, vacation or spending spree — BECAUSE IT WAS A TAX-DEDUCTIBLE LOAN!

    The entire economy now centered on the home industry and associated mortgages.

    Want to make money? Watch “Flip This House” and see a poor person spend $500,000 on a hovel and sell it for $850,000. Yeah, you can do that, too! No down payment? Take out a home-equity loan! We don’t care what you spend the money on!

    No longer was your house a home. It was your “largest investment” and something you “can profit from!”.

    As long as the interest on home-equity loans is tax-deductible, the spending spree will go on. Oh, it’s cooled for awhile…..but once the market warms up again, it’ll be back.

    I have little sympathy for people who are in over their heads.

    When we bought our home in 1975, we were “upside down” for several years….because the market was stagnant. We really didn’t care, because it was OUR HOME. Not an investment.

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