Santa Isn't Coming This Christmas Because There Isn't Any Home Equity to Tap Into

If this article at CNN doesn’t illustrate how screwed up people are when it comes to money, I don’t know what does. I keep hearing the argument that mortgage brokers are evil and have caused this real estate mess, and while that may be true, for every bad broker, there are just as many cases of people who are ridiculously irresponsible. Of course this doesn’t surprise me considering that I’ve heard advertisements telling people not to bother saving and to just use the equity in their homes.

Take this scenario that the CNN article describes:

Jackie Castleberry won’t be playing Santa Claus this year. She usually buys her grandchildren, nieces and nephews lots of gifts around the holidays — bicycles, educational games, clothes — but this year she is just struggling to keep her North Las Vegas, Nevada, house.

The interest rate on her four-bedroom home loan shot up in October and she is $6,000 behind on her payments. She now owes $168,000 on her home, which once was worth $220,000 but is now worth about $150,000.

In the past, when times were tough, she would borrow against her home’s equity — that’s no longer possible.

Ok, let’s back up a second. First of all, it says she is $6,000 behind on payments, and owes $168,000 and the house was recently worth $220,000. It doesn’t say how much she initially borrowed, but assume she borrowed $200,000. Depending on the terms of her ARM, on a loan of that rough size, at a lower rate she was probably paying anywhere from $900-$1,200 per month. Even if her rate shot up to 10%, her payment would likely be in the $1,500- $1,800 per month.

Assuming the worst-case scenario, her mortgage payment may have jumped by $1,000 per month, and that is almost double. Even so, the rate went up in October. She has made at most, 3 mortgage payments since the increase, but has probably made two payments so far. So unless her mortgage payment went up by 200% or more, there is no way the rate hike alone could cause her to be $6,000 behind.. While not impossible, it is very unlikely.

According to an MSN article:

Let’s look at a three-year ARM on a $200,000 mortgage. Taken out in 2003 at a rate of four percent, the monthly payment was $955. Now, the rate could jump as high as 7.6 percent, boosting the payment to $1,375, a 44 percent increase.

This is a much more typical example, so using 10% was just to show how much it would take to force someone to get $6,000 behind in just a few months. Either she has been behind on her mortgage well before the rate increase, or she has borrowed every penny of equity possible and can’t even keep up on those payments.

Using Home Equity Like a Savings Account

The final note that I emphasized in that article is how she stated that when “times got tough” she would just tap into the equity in the home. This leads me to believe that times got tough a lot, and if she had a $900/month mortgage and was still falling into trouble paying the bills, she shouldn’t be in a house to begin with. Granted, it looks like she has changed jobs and might not be making as much money as she used to, but you can’t just drain your home equity and then complain about your payments. You need to either try to increase your income to get back to the point where you can pay the bills, or seriously consider a change in your living arrangements.

Even more troubling is that this is fairly widespread:

Castleberry is just one of thousands of homeowners nationwide who can no longer finance their spending by tapping into their once inflated, now depreciating home equity.

Well, if you are financing your spending and buying things like Christmas gifts by pulling equity out of your home, I’m sorry, but I am not going to feel bad for you. This type of behavior isn’t the mortgage broker’s fault and it isn’t the interest rate’s fault. This is just an extremely irresponsible use of money.

At Least Some People are Able to Learn From Their Mistakes

Money’s also tight for Deborah Vick, a Las Vegas home loan officer who says she’s cut back on spending since the housing slowdown took hold and cut her salary in half. She used to have a BMW and a Land Rover, but had to give up the BMW to a company that took over her $600 a month lease.

“If you have to give up a luxury item, which you probably shouldn’t have purchased in the first place, you know, for me it was a learning experience,” she said.

It is too bad more people can’t own up to their mistakes and simply take it as a learning experience. Instead, we hear all of these stories about how it is all someone else’s fault that some people can’t keep up with their bills. But if you bought a house that you could hardly afford to begin with, and constantly sucked every penny of equity out of it, maybe you should step back and look at what happened and how you can improve it.

Author: Jeremy Vohwinkle

My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.

18 comments
Private Equity Partner
Private Equity Partner

I totally agree that pullling equity out of your home to finance other goods is completly irresponsible use of money. However, who is advising this? Surely someone should have advised AGAINST doing so instead of letting her continue.

Hopefully people will learn from this, i have from my parents that sweated to scrimp and save to pay off their debts first.

Webomatica
Webomatica

Yep this one really strikes a nerve. It seems there is a large group of people that doesn't see debt as anything to get worked up over - as long as you can handle the payments. The total amount of debt is irrelevant and there's "good" and "bad" debt.

Heidi
Heidi

[...]Check out this great post by Jeremy at Generation X Finance entitled Santa Isn’t Coming This Christmas Because There Isn’t Any Home Equity to Tap Into.[...]

escapee
escapee

I feel bad for these folks, but they brought it on themselves.

I can't tell you how many times I have asked my husband, "What do all these people DO to have the money to buy these huge houses, new cars, etc? They can't ALL be doctors and lawyers!"

My income puts us supposedly in the top 5%, but our house is nowhere near being as big/new as most of the houses in our region. We also don't have a lot of new cars, expensive possessions, etc.

It turns out the answer to my question is that they *didn't* have the money for it all and now is their day of reckoning...

Rehoboth Realtor
Rehoboth Realtor

I guess I'm fortunate in that I paid my mortgages off two years ago before all this mess started. I was lucky in that I had been saving money for three years and I got a profit sharing dividend from a company I wrote software for and instead of blowing the money on things like clothes, cellphones, ipods, a sirius sattelite system and other stuff I would have blown the money on before, something made me decide to go "debt free" and use the money to pay everything off. It was a good decision...

One thing that always bugged me when I was working in a corporate office was other employees who alway griped about not having enough money but they walked into work every morning with a $7 cup of Starbucks and a couple of egg mcMuffins, etc and then went to lunch and spent another $10-$15. they never get it that those incedentals at $20 per day add up to car payment per month.... not to mention most of them smoked a pack or two a day, went to concerts and bars all the time but they want you to feel sorry when they're broke.

Mrs. Micah
Mrs. Micah

Like plonkee, and others, I feel sorry for people in this situation. She's probably trying to do Christmas with gifts because she wants her loved ones to be happy. It's a sad thing too, because she may not know how to throw a cheap and happy Christmas...

Fecundity - Link Roundup
Fecundity - Link Roundup

[...]Generation X Finance posts about a CNN article on a woman in Nevada who is in danger of losing her house, apparently due to repeatedly [...]

Fecundity
Fecundity

I feel bad for people in this situation because it's an unfortunately harsh consequence for their mistakes. However, unless they were actually swindled by someone, they only have themselves to blame.

Ms. Castleberry needs to be talking to her lender and perhaps to a debt counsellor. If she no longer has a large family living with her, it looks like it's time to downsize out of that four bedroom house. The author of the post seems to be right about her falling behind on her payments before the rates were hiked.

The Financial Blogger
The Financial Blogger

I don't feel bad for those people unlike Plonkee. It's up to them to get their finance on track and stop expecting to get more money from their house. Then, they will blame mortgage brokers? That's too easy.

Who should I blame if I have a car accident? Ford for inventing the car? You would never run into a deadly accident if we would have stayed with horses after all. Who should I blame if I become an alcoholic? Budweiser?

People have to take some level of responsibility from their actions. Taking from granted that you could borrow against your house to finance your daily living is totally stupid. You are destroying your net worth. It only shows poor money management. These people don't need more money, they need to know how to follow a budget.

BeyondtheConsumer
BeyondtheConsumer

I can't believe anyone would pay $600 a month to lease a car.

thebaglady
thebaglady

yeah, I hate how the mainstream media is painting a picture of these irresponsible spenders as "victims". A lot of them are fraudsters like Casey Serin and many others just want to look rich. It's a slap in the face to people who work hard and save.

Anitra
Anitra

I agree with plonkee - I do feel bad for people who ended up like this. But it is (usually) their own poor planning that got them there. They need to learn the cardinal rule of finance: spend less than you earn. If there's no wiggle room in the budget at Christmas, you make gifts.

plonkee
plonkee

I do have some empathy for people that have ended up like this. I can't imagine that it's remotely enjoyable to feel as if you are ruining Christmas for kids that you love.

Fortunately, Christmas won't be ruined by not having expensive gifts, but I'm not sure how she can keep her house.

Patrick
Patrick

I can't feel sorry for someone who can't borrow against their home equity to buy Christmas presents. That is just ridiculous to think that people should use their home equity for consumable items and frivolous expenditures. An emergency medical bill - OK. Christmas gifts or new rims for your ride - No. It's amazing that so many people have been programmed to believe that if they have any access to money in any form, that they can and should spend it. The lady in the article is also a grandmother. I wonder how much, if any retirement savings she has?

Minimum Wage
Minimum Wage

Renters have never had one cent of home equity, and therefore none to tap into. I'm not feeling sorry for these homeowners.

Frugal pursuit
Frugal pursuit

I cannot imagine using the equity in my home as a way to "cover" the costs of gifts. It is a frivolous use and I believe a way to subsidize a overspending lifestyle. Children will remember time you spend with them and a single thoughtful gift. How many (and how high cost) is not an ideal goal.

It is nice to read that some people are being sensible after the rate adjustment. Owning up and getting rid of the luxury items to keep your home is practical. Hopefully, more people who thought it was easy living off the equity will reconsider that next vacation or gift or luxury purchase.

Dave
Dave

You would hope that maybe this bubble bursting will knock some sense into people regarding the insanity of borrowing money to buy "stuff" that doesn't have any residual value.

But no, they will blame the mortgage brokers for "tricking" them, and the cold heartless banks for not dropping their interest rates to 4% (and losing money), and investors for driving up housing prices (which they gladly used to borrow more money), and global warming, and Santa Claus, and...

I was a mortgage broker, and while there were some shady ones, mostly it was just a matter of *giving people what they wanted* even after you explained how the rates could adjust.

Grow up people, take some responsibility already...