Growing number of irresponsible owners walking away from home equity loans

There have been countless stories during the bursting of the real estate bubble about homeowners who've simply refused to pay their mortgages.

Now it looks like there's an even larger group of deadbeats: Folks who leveraged their homes to the hilt and are just walking away from that home equity debt, too.

I read the New York Times article on this trend around 8:30 a.m. this morning and put off blogging until now because it took me that long to quit being mad. And I need to type fast, as I feel my blood pressure starting to rise again.

According to American Bankers Association data cited in the story, the delinquency rate on home equity loans is higher than all other types of consumer loans, including auto, boat and personal loans, as well as for credit cards.

OK, I am sadly not surprised that people viewed their homes as ATMs instead of the place to enjoy and raise their families.

What makes me mad, though, is what the story calls "one of the paradoxes of the recession: the more money you borrowed [against your home], the less likely you will have to pay up."

Broken system, bad attitude: The Times talked to a Phoenix-area real estate lawyer who noted that "when houses were doubling in value, mom and pop making $80,000 a year were taking out $300,000 home equity loans for new cars and boats. Their chances are pretty good of walking away and not having the bank collect"

And what really gets my blood boiling is the attitude, apparently prevalent across the country, that it is OK to welsh on your obligations.

There's a lot of political hand-wringing and wailing about "what's happened to the country I knew?"

Well, the country I grew up in was one where people did what they said they would do.

Even in bad times, they found a way to meet their responsibilities instead of just walking away and letting someone else clean up the mess that they made.

No longer.

"I am not going to be a slave to the bank," one Arizona real estate agent in default on a $94,873 home equity loan told the Times. He hasn't heard from the lender he owes, so he's operating on the "maybe it will just go away" theory.

This guy also says "I was taught in real estate that you use your leverage to grow. I never dreamed the properties would go from $265,000 to $65,000."

Then there's the guy in New Jersey who's ignoring his $190,000 equity loan, whining that "it's not the homeowner's fault that the value of the collateral drops."

Well, what I learned was that you man up and pay your debts. You don't just shrug your shoulders and walk away.

And while it might not be your "fault" that your property dropped in value, it's still your responsibility to honor the contract you signed.

Yes, banks were as greedy as loan applicants. And too many lenders are now guilty of abdicating their responsibility to collect what's due.

And yes, some folks are in home-related debt trouble because they lost their jobs.

Welcome to life. It happens. 

But when folks are so cavalier about doing what is right, what does that say about our society?

Even worse, it makes it that much harder to come up with policies designed to help folks who legitimately need some exceptions made to the rules.

Did tax policy contribute to the trouble? Is U.S. tax policy when it comes to housing part of the problem here? Maybe.

As I mentioned earlier, a residence for many folks is no longer a real home. People bought and still buy homes based primarily on what kind of money they think they can get out of it, either via an equity loan or from a future sale.

That means they over-extend themselves from the get-go. And home-related tax deductions -- loan interest and property tax write-offs -- are used as excuses for the irresponsible debt.

Then we, and by we I mean real-estate beholden members of Congress, keep adding to the tax breaks, with PMI deductions and tax forgiveness on foreclosures and, yes, the repeatedly extended first-time homebuyers' credit.

Or as Tax Update Blog describes the homebuyers' credit, an inevitable failure at great public cost without altering the underlying weakness of the housing market.

So now we wait for the housing cycle to come around.

In the meantime though, we're apparently left with the people who have no business owning a home but who have dug themselves, and all us taxpayers now footing the bill, into such a deep hole.

I realize there's little that can be done about all these deadbeats. But I just wish I could find each and everyone of them and make them sit down with my mother for the talking to that they so obviously need.

Related posts:

• Implicit support for continuation of the first-time homebuyer credit?
• Hot new housing trend: Renting
  
• When renting is the right choice
• Economy killing home tax break, redux
• Did the home sale tax exclusion kill the economy?
• The unfairness of housing tax breaks?
• Is it time to kill the mortgage interest tax deduction? 
• Mortgage interest deduction madness
• Tax policy and the American homeownership dream
• 'Accidental' mortgage interest deduction
• Foreclosure's other tax cost
• When not to pay down your mortgage
• 'Successful, costly' first-time-plus homebuyer credit ending
• The federal homebuyer credit's 'exit strategy problem'

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Comments

[Steve]

Kay, I working on my CFP designation. I just passed the exam last November. As an objective planner, I would never tell a client to assume more debt than they could possible handle. It's unfathomable that banks were not providing they same objective advice as a diligent planner would provide. Yes, if everyone had self-control we wouldn't need lending standards. And, we wouldn't need financial planners either (and I might be out of job!).

[Steve]

2010 Headline: A Growing Number of Irresponsible Owners Walking Away from Loans

What a 2005 headline should have read: A Growing Number of Banks Ditching Lending Standards and Making Irresponsible Loans

Two sides of the same coin.

[Steve]

Kay, I applaud you for your self-control and mindfulness. Unfortunately, not everyone has that same self-control and it can be exploited (not just in lending). What happened in the last decade was unprecedented! Obviously, it took bad decisions from both lenders and borrowers to create such a huge catastrophe. I'm not pointing fingers at one or the other. I look at it this way: if I was a prospective home owner (which I am), I would like to know that I made a good investment and my fellow neighbors have all met rigorous and objective lending standards. I would not want to count on their self-control when making such a significant investment. We cannot change the sins of a few years ago. At this point, the only way housing finds stable ground is when the deadbeat loans are purged from the system and homeownership again is for the those who meet the highest lending standards. Then, we'll return to the life you once knew.

[Kay]

I understand that lenders fed and perhaps even started the loan mania, but really, we have to have banks decide first? I know what I can and can't afford. I've been offered loans, lines of equity, credit cards, etc. and turned them down, thank you. Have we no individual self-control?

[Steve]

The country you grew up in had responsible lenders. Very few people walked away from loans because very few people were given loans they could not afford in the first place. People felt obligated because not just anyone could borrow hundreds of thousands of dollars. There's a reason credit standards existed and why ignoring them helped create the deadbeats of today. Responsible borrowing starts with, and will return with, responsible lending--not vice versa.