Tuesday, February 24, 2009

Collateral damage

No, it isn't about the victims of war...or even illegal aliens inadvertently picked up in a raid.

This is about financial collateral, the stuff you put up with the bank when you take out a loan.

Typically, good collateral is the equity in your home, stocks and bonds, and your ability to bring home a paycheck every week.

Not so good right now. Home values are off 20% and still falling, the Dow has gone from 14,000 to 7,000 in a year, and unemployment is rising.

This is not too relevant until the bank closes. That's when they have to figure out what this "virtual" pot of money is really worth at this point in time. No wonder the prez wants to avoid bank closures, especially the big ones like CitiBank and Bank of America.

To nationalize the banks cheapens ALL the banks, even the responsible ones who aren't in trouble.

From an individual standpoint it is a great lesson about building equity in your home. Being upside-down on a new car is inevitable. It loses thousands in value when you drive out of the dealership with it. And you have to hold on to a car for a LOOOOOOONG time for it to begin growing in value.

Homes generally grow in value, but we've fallen prey to spending the equity. It isn't new. I remember watching TV in the 1960's and the banks were touting the H.E.L.P. or Home Equity Loan Plan. "Make your house work for you," they said.

And there may be times when it is wise...say to put a new roof on the house.

But we decided to borrow to build the home theater room or buy the hot tub or go to China for the Olympics with that money.

Some people stayed afloat by refinancing to pay off the credit cards with the appraised value of the home.

But they never built equity. Now home values have tanked they are upside-down on the mortgage. And responsible home owners are getting hit with the collapse as well. 20% is a lot to make up. And if you have to move, you are really stuck.

You have to wonder where we would have been without the loose lending practices that led to this bursting of the bubble. Sure, the appreciation of our homes would have been much more gradual and less dramatic; but we wouldn't have seen a total collapse of our credit market.

We didn't learn anything from the S & L crisis.

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