A new study estimates that 34% of  mortgage defaults are due to people who borrowed against the increasing equity of their homes during the bubble years.

The money that was extracted seems to have been used on consumption or home improvements vs. buying investments or paying down credit card debt.

Home equity-based borrowing is stronger for younger households, households with low credit scores, and households with high initial credit card utilization rates. ...

Our estimates suggest that home equity-based borrowing is equal to 2.8% of GDP every year from 2002 to 2006, and accounts for 34% of new defaults from 2006 to 2008

So a third of all of the mortgage defaults are probably due to people using their homes as piggy banks. 

A large part of the recovery in GDP after the 2001 recession was due to this phantom wealth.  What's going to replace that portion of the GDP now that many of those big borrowers and big spenders have empty piggy banks?

 
Posted by Tim Maitski "Video Agent Guy" on 09/04/2009 09:00 PM   Comments (4)  

4 Comments on 34% of Defaults Due to Borrowing Against Home Equity

SEP
04
205,846 Points 19 Featured Posts Outside Blog

Tim,

It doesn't take much to debunk this rationalizing. If they defaulted after qualifying and living with the loan it isn't the loan but some other reason! Of course had they said that 34% of the loans in default were cash out refinances that would be believable. It makes as much sense to say that 100% of loan defaults are parents fault, if the defaulters parents had been childless their children couldn't default.

This is pandering to the PC finger pointing.

Why did the debtors stop paying? It is after all not the existence of the loan but the non-existence of the agreed upon payment that is the default!

Bill
9:25pm • #1
216,898 Points 5 Featured Posts Outside Blog

Good question. They either have to start all over or make money in a more conservative way. We will get some appreciation again and yes people with borrow against their home again in the form of an equity loan.Hopefuly most did learn something.
11:19pm • #2
SEP
05
595,717 Points 82 Featured Posts Localism Sponsor Outside Blog Hit Router

Tim...

Investors were notorious for continually pulling money out of the equity in their houses to purchase more. It was a house of cards that had to collapse at some point.
7:09am • #3
216,516 Points 34 Featured Posts Outside Blog

William,

I don't know if you clicked through to the article but I think that's the point they are making.  As the value of homes increased, many homeowners tapped into this increase in home value and ended up defaulting because it.  They are saying 34% of defaults are because of this vs. someone buying at the peak of the market and then seeing prices fall. 

The big problem I see is that this borrowing is what drove the economy during those years. Our economy was driven by the unsustainable increase in house prices driven by the banks giving out loans without any kind of finanacial qualifying.  So now that those two things are gone, it's going to be really tough for the economy to turn around.
7:41am • #4

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Tim Maitski "Video Agent Guy"

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