Saturday, June 11, 2011
Second Mortgage Killed the Economy Star
A recent article in the Wall Street Journal pointed to the higher number of individuals with negative equity and how many of those have a second mortgage on their primary residence. It eludes the severity of these second mortgages and the impact they have on this negative equity when it states “borrowers with second mortgages had deeper levels of negative equity—an average of $83,000 compared with $52,000—than borrowers without second mortgages.” I personally cannot image what it must feel like to have even the $52,000 hanging over my head let alone nearly 60% more at $83,000.
During the height of the housing boom Americans took $2.69 trillion dollars in equity out of their homes. Yes in many cases this was to put it back into the home through fix ups, new appliances, additions and remodels. Although vast numbers of individuals used their home equity as an ATM, taking out cash; cash that they later used on vacations, cars, clothes and other disposable and depreciating items.
Is it any wonder that our economy would take a turn for the worse when first homes started to not become as valuable as the loans being taken out on them. When you drain the equity out of the house soon it is going to be flat if not upside down. It is basically the same as taking the cash out of a business all the time and expecting it to be able to continue running and increasing value. Secondly, we were spending money we didn’t earn on things we didn’t need. Hmmm… sound familiar? Living Below Our Means was a forgotten concept and our star economy began to wheeze. A wheeze that we know turned eventually into pneumonia that it is still suffering from.
So as we personally start to recover or move on from the recession, we need to learn from our own or other’s mistakes and Live Below Our Means and be cautions to deplete the equity from an asset just for temporary pleasure.Second Mortgage Misery