Jan202017

Federal Reserve’s Dudley predicts return of HELOC abuse

The Federal Reserve’s Dudley believes people will forget the lessons of the housing mania and return to profligate home equity spending.

When people lose money (or foolishly waste it), they often behave differently after the incident. Wise people actually take action to prevent a recurrence of the tragedy. For example, if a thief breaks into someone’s house, the homeowner installs better locks or alarm systems to avoid a future loss of property or worse.

However, when the crime is more complex than breaking-and-entering, or when the government is the facilitator of the crime, it can be much more difficult for the victims to protect themselves, but it’s just as necessary.

Ben Bernanke reflated the housing bubble partly to expand consumer spending from what he called the “wealth effect.” In reality, the wealth effect is an illusion more aptly described as the “Ponzi effect.”

When house prices go up, people are not encouraged to spend their savings, they are encouraged to take on more debt. The increase in consumer spending is largely a result of increased borrowing, which is a benefit to the member banks of the federal reserve. Since our current system is set up to bail out the banks when they get in trouble, when Ponzis take this free money the federal reserve wants them to have, the US taxpayer will end up paying off the bills of these Ponzis when the Ponzi scheme collapses yet again.

How do you feel about having your tax dollars paying off the debts of Ponzis and paying the bonuses of the bankers who facilitated their theft? Personally, I don’t feel good about that, yet, that’s exactly what some governors of the federal reserve want to see happen.

Rising home values aren’t enough to shake consumers’ memories of the financial crisis

Krystina Gustafson, Tuesday, 17 Jan 2017

Consumers still see value in buying and owning homes. Yet with memories of the recession still fresh in their minds, the recent lift in real estate prices hasn’t been enough to persuade them to spend against that growing value. …

“People haven’t actually tapped that housing wealth,” Dudley said, noting that home values have increased 40 percent since 2012.

Perhaps it’s my own bias, but I would like to believe people learned from the housing bubble and bust. Perhaps people haven’t tapped their housing wealth because they realize mortgage equity withdrawal is a bad idea. Appreciation is not income. Credit is not savings. Debt is not wealth.

Looking forward, Dudley is unsure whether the recent gains in consumer confidence, which hit a 15-year high last month, will translate into elevated levels of spending. However, as the recession moves further into the rearview mirror, he predicts housing equity will once again become a source of consumer spending.

“As time passes, people will forget the financial crisis,” Dudley said.

Is this really something we want? Do we want people to return to their foolish ways?

Comments like that enrage me.

He added that it’s very unlikely there will be another financial crisis in the next five to 10 years, thanks to healthier balance sheets and a safer financial system.

While that may be true, if people followed his advice and began spending their home equity, we could probably destabilize the system much quicker. Idiot.

Mortgage equity withdrawal should be limited

In order to prevent foreclosures and theft of taxpayer money through bailouts, mortgage equity withdrawal should be limited and regulated.

I don’t like government paternalism. When Ronald Reagan came to power and began our 25-year experiment with government deregulation, I thought it was a good idea. It used to really annoy me when I would see paternalistic politicians who believed they knew what was good for me and for society, and that their ideas of right and wrong should be legislated. Government intrusions into the lives of citizens should be kept to a minimum, and citizens should have the right to make their own decisions and live with the consequences.

Well, maybe not.

I used to believe all of that, but based on what I witnessed during The Great Housing Bubble, I see good reasons to support government paternalism.

First, people refuse to accept the consequences of their actions. People want freedom of choice, and they expect the benefits of their decisions when things go well; however, the moment events don’t meet their expectations, they want the government to bail them out. Individuals, organizations, and entire industries share this trait.

Nobody ever steps forward and says, “I screwed up, and I don’t think the government should bail me out.” If gains are privatized and losses are collectivized, then for taxpayer protection, we need a paternalistic government regulator looking out for the collective interest — which entails unpopular regulations.

Second, even if people accepted the consequences of their actions (which they never do), sometimes these consequences impact others who had nothing to do with the original decision. If every insolvent homeowner accepted foreclosure, and if every lender accepted the losses without pleading for a government bailout, the economic consequences of their private foolishness would still have enormous impacts on the collective. Everyone suffers, including all of us who chose not to participate in the transaction.

When people accepting responsibility for their private actions still causes excessive collateral damage, then the activity should be regulated to save the rest of us.

I profiled over 1,000 properties where the borrowers spent themselves out of their homes. There is a fascinating, “train wreck” quality to these stories, with lessons to be learned about managing personal finances in general and mortgage debt in particular; however, most people will not learn these lessons. If given the chance, people will abuse their HELOCs, and lenders will extend the credit to people to allow them to do so. Without restrictions on mortgage equity withdrawal, people will spend their houses and lose their homes.

lost_in_foreclosure

This conclusion is inescapable. The hundreds of properties I profiled clearly demonstrated this phenomenon is not isolated. The millions of foreclosures caused by refinancing and HELOC abuse are a testament to the depth and scope of the problem. If we do not change the system, we will see a repeat of this problem — and fools like Dudley are counting on it.

Some people are spenders, and some are savers. No amount of education is going to change that. Many of the outrageously pretentious spenders obsessed with conspicuous consumption are not going away. As I pointed out in Southern California’s Cultural Pathology, we have many spenders in our midst, people who will spend and spend until their creditors cut them off.

Many spenders deal with the painful reality of credit contraction, and if these people suffered in isolation and did not request government handouts, I would be inclined to leave the system alone; however, these people are not suffering alone; they beg for the government to give them some of my money to support their foolish ways. This is where I draw a line.

I would ban all forms of cash-out refinancing except for home improvement projects with certain restrictions or education spending.

There is no good reason for people to increase their mortgages to fuel consumer spending; anyone who makes this argument because of the economic benefit of mortgage equity withdrawal obviously has not been paying attention to the fallout of The Great Housing Bubble.

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