US consumers' forced to halt "Economic Cannibalism"

by eastvanray | October 23, 2008 at 09:11 am

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OPINION

The only thing surprising about the outcome of practicing a personal finance policy equivalent to eating your own young is that anyone is surprised. Consumers can not be faulted for dipping into some of their home equity from time to time for things that add value like home renovations or to get them past a period of unemployment. Afterall that is one of the main reasons to own your own home, right? That having been said, using up ALL of your home equity to finance a lifestyle that your family cannot really afford is pure financial suicide. I am all for people striving for the American Dream but you have not achieved that unless you can afford it.

As we have all been told, the banks are not without blame here either. The fact that they thought by selling these bad loans to others they were avoiding risk we now know to be just as much a false economy. The lending practices of banks, however, are a response to demands for those loans by consumers. If consumers didn't demand those loans then banks would not have made them. Perhaps this is a lesson on why consumers should not base their financial decisions on the advice of the institutions that make their profits from loaning money. Either way consumer behaviour must change. I am not advocating the kind of frugality that my grandparents practiced as a result of living through the Great Depression but something in the middle where consumers ask two simple questions before going into debt to buy something: Do I really need it? and, Can I really afford it? If these basic principles were applied we would all enjoy a much more stable economy.

'Underwater' homeowners threaten economy 12 million owners owe more than their homes are worth Tom Brown, ReutersPublished: Thursday, October 23, 2008
CAPE CORAL, Fla. -- Long before she filed for bankruptcy, Ann Neukomm was "under water" -- she owed more on her mortgage than her house was worth -- a situation more and more Americans are finding themselves in.

As the financial crisis hits Main Street America, nearly one in six U.S. homeowners are finding themselves in the same position, threatening the U.S. economy with a new wave of foreclosures and bankruptcies.

About 12 million U.S. homeowners owe more than their homes are worth, compared with 6.6 million at the end of last year and slightly more than three million at the close of 2006, said Mark Zandi, chief economist at Moody's Economy.com.
Marc Charney, president of CharneyRealEstate.com, hangs a foreclosure sign on a house in the Boston suburb of Dedham, Mass., in March 2007. "At the root it's 'the' problem," said Zandi. "If you're going to put your finger on the one thing that's gotten us into this fiasco, it's the fact that millions of homeowners are under water on their homes."
If, like Neukomm, these homeowners go into foreclosure, it would add to the oversupply of homes, delay a recovery in the housing market, and add to pressure on banks.

Already, U.S. consumer spending is slumping as homeowners find they can no longer take equity out of their homes to fund their lifestyles.

In a slowing economy, it doesn't take much to push an underwater mortgage into default.

"When you're under water and you have some kind of hit to your income or some kind of unintended expense, that's when you default. And so now we've got this noxious mix of millions of people under water and quickly rising unemployment," Zandi said.

Like Neukomm, 57, many people got into trouble by refinancing mortgages to pull out cash when rising property values made it seem like an almost risk-free deal.

Banks are responsible for lending money they didnt have. The banks didnt reveal to the general population what they were doing. The people that borrowed the money didnt know about the credit bubble. The banks are completely responsible.

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US consumers' forced to halt "Economic Cannibalism"

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