by Tina Fountain,
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UNITED STATES, Aug 24 — In the last 20 years, investment and mortgage brokers have made a killing refinancing mortgages and using the accumulated home equity to pay off debt. A Second Mortgage, a term that in my parents day, was only whispered in dark alleys, has all but been replaced by the politically acceptable "Line of Credit". For many home owners, this is as common as a credit card.
Have we as a society, swung too far in the other direction? Would we be in this mess if we had of retained more of those Depression era values
I
n the last 20 years, investment and mortgage brokers have made a killing refinancing mortgages and using the accumulated home equity to pay off debt. A Second Mortgage, a term that in my parents day, was only whispered in dark alleys, has all but been replaced by the politically acceptable "Line of Credit". For many home owners, this is as common as a credit card.
Many borrowers begin innocently enough, refinancing in order to take advantage of lower interest rates. Once their advisor points out how much equity is available in their homes, then the wheels start turning. We could pay off the credit cards, finally renovate the kitchen, or take that trip to Hawaii we’ve always dreamed of. Then suddenly, after a home appraisal and a few signatures, you’re debt-free; except for your mortgage, which has increased by 20%. In addition, you now have a handful of empty credit cards, just ripe for the picking. If you think this is an exaggeration, just type in the phrase "home equity loans" in your favorite search engine, and be prepared to get over 5,6000,000 million results.
When I was growing up, paying off your mortgage was the goal of every home owner. This was more than a goal, it was a way of thinking that was ingrained and passed on from parent to child. People sacrificed vacations, and the term "reuse & recycle", didn’t exist – the concept was an automatic given. Most large purchases were planned, with the attitude "don’t buy it until you can pay for it."
This is not to say people didn’t go bankrupt or face large debt, but overall the attitude and acceptance toward refinancing was very different. Sadly, now many of those diligent homeowners who saved all their lives are now victims of the latest mortgage trend – the Reverse Mortgage. No longer able to afford to live off their savings, these retirees have agreed to mortgages that will basically turn over their properties to the hands of the bank when they die.
How did we get to this point? How did we evolve from a society where a Second Mortgage was considered shameful, and absolutely the last resort; to a place where refinancing is as commonplace as a applying for a credit card.
Many will argue that the change in thinking is simply the result of a new generation that never lived through the Depression. These are the children of parents whose motto was save versus spend, and who are now breaking free of those imposed values.
The other obvious contributor is simply inflation. Take an "I want" society, increase the rate of inflation, minimize wage increases, and something has got to give. Add to this, easy access to credit and you have the perfect formula for a debt ridden economy.
Here are some examples of inflation in action based on an income of $40,000.
In 1960, that $40,000 would be the same as having $291,014.86 today.
In 1970, that $40,000 would be the same as having $222,011.34 today.
In 1980, that $40,000 would be the same as having $104,539.32 today. (hmmm...maybe something to do with the 18 percent energy hike in 1990 - that’s for another article).
In 1990, that $40,000 would be the same as having $65,906.96 today.
It’s all relative, you say, "Wages have gone up since 1960, it all balances out".
That’s true, wages have increased, but not nearly enough to compete with the rate of inflation.
According to the Consumer Price Index Detailed Report for March 2008:
"Consumer prices rose 4.1 percent in 2007, the largest increase since 1990.
Energy and food inflation increased significantly in 2007; Energy prices rose 17.4 percent in 2007, its biggest jump since an 18.1 percent increase in 1990. Food prices also recorded their biggest increase since 1990, increasing 4.9 percent in 2007 (see Table 1).
Increases in energy and food inflation alone accounted for the acceleration in overall inflation in 2007."
The average wage increase is in the 2 percent range. That’s the high end and if you are lucky to have a job. The current national unemployment rate is at 9.4 percent.
Have we as a society, swung too far in the other direction? Would we be in this mess if we had of retained more of those Depression era values. It’s hard to say, but suddenly I have more respect for the frugal ways of my grandparents.
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