Debt Trap

From the Contra Costa Times:

More use homes as main asset

Instead of building a nest egg for retirement, a growing number of homeowners are putting themselves in a debt trap.

Economists and investment advisers say that more Americans are relying on their homes as their primary asset for retirement. These retirees-to-be reckon they can always tap the expanding wealth in their residence to cover their leisure years.

The reasoning goes something like this: Need some cash? No problem, just get a home-equity line of credit. And because home values have skyrocketed in recent years in places such as the East Bay, homeowners figure they can replace the equity lost from taking out the loan within a year or two. Plus, down the road, they assume they can always just sell the house or get another loan to raise some quick cash for retirement.

"People are making the mistake of thinking they live inside a big piggy bank," said Libby Mihalka, president of Altamont Capital. "They don't realize it can all snowball out of control very quickly. Their house is not an ATM."

Two new studies confirm the trend. One, by the Securities Industry Association, found that the declining savings rate in America in recent years has coincided with an increase in mortgage debt. Another study, by a San Francisco-based economist with the Federal Reserve Bank, found that the level of property-debt burden, compared with income, has risen in recent years.

"This is a form of financial insanity," said Frank Fernandez, chief economist with the Securities Industry Association. "You are digging yourselves deeper into debt using an asset that could decline in value."