In Massachusetts, Home Equity Loans Mean Financial Heartbreak
Gregory Truman and Wayne Pruitt didn’t need a real estate agent to sell their Brighton, Massachusetts, condo two years ago.
What they could have used, according to this week’s Boston Globe Magazine, which features the rise and fall of home equity loans in the region as its cover story, was a crystal ball.
The Massachusetts housing market was so hot that Truman, then an assistant professor of information systems at Babson College, and Pruitt, minister of the Union Church in Waban, were able to sell the property in a matter of days for more than $468,000. They promptly upgraded, paying $644,000 for a 1930 Colonial across the border in Brookline.
They got a home loan for $333,700 and secured a home equity line of credit for $140,000 (using $70,000 of that money for the initial purchase of the home and $52,000 to spruce up the place).
Over the next two years, in addition to sanding and painting both inside and out, the couple landscaped the front yard, added stone walls, and put pavers on the driveway. Yet in May of last year, the house suddenly became unaffordable when Truman learned he hadn’t made tenure.
He would be out of a job by August.
Downsizing was in order. Once again acting as their own agents, Truman, 46, and his 56-year-old husband put the house on the market in May of this year for $748,000, hoping to yield a decent return as well as the cost of their improvements.
Yet even after three busy open houses, the only offer they received came in the form of a casual inquiry through a neighbor as to whether they’d go as low as $699,000. Unwilling to take a loss, the couple decided to refinance.
They lowered their monthly payment by using a somewhat risky mortgage with an adjustable-rate negative amortization, which allows them to pay less interest than the amount actually being charged. The difference, however, is added to their loan balance, essentially chipping away at their equity.
Truman views the loan as a stopgap but is nevertheless chagrined to find himself in such a predicament. He doesn’t foresee a housing market recovery until long after next year’s round of faculty hires.
“If I find another academic position in another part of the country, I really don’t think we’ll be able to sell and get any sort of return. I regret buying the house. It was really a blunder,” he said.
Perspective is easily regained now that we’re on the other side of the real estate bubble — the bust. During the biggest borrowing frenzy in history, homeownership became the American Joyride, not just the American Dream.
Practicality was almost illogical. People skimmed off layer after layer of home equity to upgrade our kitchens or pay down credit cards, and home values magically rose as if to compensate within the same year, sometimes within months. More than just places to live, houses morphed into boxes of cash.
But with buyers back in control and perspective restored, most homeowners aren’t feeling quite so wealthy anymore. As our equity levels recede, many feel foolish about stretching finances so thin. Clearly, with the midyear foreclosure rate up more than 60 percent over last year, it’s no fluke.
Our infatuation with home equity loans has gotten us in this bind, and the spending spree isn’t exactly over. Higher mortgage rates have homeowners in Massachusetts rushing to refinance out of their adjustable rate loans, and most borrowers are upping their debt burden and walking away with cash.
According to Freddie Mac, however, the implications of all this borrowing are coming into sharper relief. Economists and even some real estate agents would welcome bit of a slowdown, saying homeowners’ eagerness to upgrade, expand, and buy take out bigger Massachusetts mortgage loans than they should may come back to haunt them come retirement — if not sooner.
“People have gotten used to relatively large gains in values,” not only in real estate but in the stock market, warns Mark Zandi, chief economist Moody’s Economy.com. “This period of growth is unlikely be repeated again in our lifetimes. It’s important that people adjust their expectations.”
- It’s easy to understand why homeowners adopted such expectations. Average selling prices for single-family homes in Massachusetts posted appreciation of 55 percent from 2000-2005, while condo prices surged 81 percent.
- Those soaring values helped push the level of Massachusetts mortgage debt over $207 billion by the second quarter of this year, a growth of some 114 percent over the first quarter of 2000.
Massachusetts mortgage lenders sought to make ownership more affordable by expanding the availability of exotic products like interest-only loans, adjustable rate mortgages, and so-called 80-20s, which provide 100 percent financing through a first mortgage covering 80 percent of the loan amount and a higher-cost second mortgage covering the balance.
This was a nearly non-existent market just two decades ago, when standard 30-year, fixed-rate mortgages were the option of choice. But aided by low interest rates and a 1986 law that eliminated deductibility of interest on credit cards, the mortgage industry encouraged homeowners to spend their newfound wealth by borrowing against it.
In Massachusetts, the outstanding debt on home equity lines of credit alone has swelled nearly six-fold since early 2000 to $17.88 billion. That’s no small amount — and one that we can only expect to lead to massive fallout in the years ahead unless people wise up and get out now.