The Scourge of Cash-Out Refinancings

Thirty Years in a Home -- And No Equity

It used to be that people who had owned homes for a longer time were less leveraged than recent purchasers, but the refinancing boom changed that. “A coordinated increase in leverage among homeowners during good times will lead to sharply higher correlations in defaults among those same homeowners in bad times,” two authors of a new academic paper wrote.

--Floyd Norris, "Confronting High Risk & Banks"; The New York Times (12/10/2009)

I first noticed it about two years ago selling condo's perfect for downsizers.

The 50 and 60-somethings coming through my open houses would "ooh and ah" -- but that was usually it. Or, they would say how much they loved the condo, and would then ask if the owner was open to a contingent offer (older and struggling with health issues, fixed timetables, etc. they usually weren't).

It turns out many of these would-be Buyers, despite owning their current home for decades, had little or no equity.

I suppose these people could all have borrowed against their homes to buy toys and go on vacations.

But this is Minnesota, after all.

Wall Street's "Unretirement Plan"

My vibe was that the proceeds of all those cash-out refinancings (basically, pulling the equity out of your home) went for things like medical, helping out kids, paying down other debt, and the like.

It sure didn't go for fancy new cars or clothes -- I saw very little evidence of that.

Guess who takes care of retirees who've exhausted all their savings? (It's not Wall Street).

P.S.: In the same vein, I've lost count of how many foreclosures I've now seen where, when you look up the tax assessed value and what the foreclosed owner paid, you can't find anything for the latter value. That usually means the owner who lost the home owned it at least since 1991, which is when MLS generally started tracking that.

Imagine: 20 years-plus in a home, and no equity!