The Home as ATM

Arnold Kling

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From Mark Thoma, who in turn saw it on Richard Green, a study by Michael Lacour-Little, Eric Rosenblatt, and Vincent Yao.

Here we use public record data to study Southern California borrowers facing foreclosure in late 2006 and 2007. We estimate property values at the time of the scheduled foreclosure sale with the automated valuation model of a major financial institution and then track actual sales prices for those properties that actually sold, either at auction or as later as REO. We find that virtually all of the borrowers had taken large amounts of equity out of the property through refinancing and/or junior lien borrowing with total cash extracted exceeding $300 million. As a result, losses to lenders exceed those of borrowers by a substantial margin, calling into question policies aimed at protecting borrowers.

Although I am second to no one in my opposition to policies aimed at protecting borrowers, I do not think I would cite this study, accurate as it may be. The problem is that Southern California in 2006 and 2007 is not at all representative of housing markets overall in 2008 and 2009. My guess is that in other regions we see less extravagant use of houses as ATM's. More importantly, house price declines really kicked in in 2008 and earlier this year.

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COMMENTS (4 to date)

Latest Comment

The Cupboard Is Bare writes:

In order for us to get a mortgage, the bank required that an appraisal be done. The appraisor offered to show in her report that the house was worth more than its true market value so that we could ask for a bigger mortgage. We declined.

We applied for a mortgage so that we could effect some repairs. When they reviewed our application, they repeatedly asked us if we would like to increase the amount to be borrowed. (It seemed to bother them that we planned to borrow only 25% of what the house was currently worth.) We declined.

I don't know how things are currently, but the mortgage industry definitely encouraged you to use your house as an ATM.

Another problem is that people thought about real estate in much the same way as they did with tech stocks...the sky is the limit. So, people borrowed more than their homes were worth, because they assumed that over time their homes would only increase in value, and that they would come out ahead of the game.

Posted August 1, 2009 3:30 AM

rick writes:

My neighbors (when I lived in the US) used their home as a college fund for their children.

Posted August 1, 2009 9:49 PM

Steve Sailer writes:

Yes, but California by itself is what largely crashed the economy -- California accounts for a sizable majority of all mortgage dollar defaults in America.

Posted August 2, 2009 6:02 AM

steve writes:

According to the Harvard University Joint Center for Housing Studies' annual report on the housing market, equity cash outs rose from 32 billion, or about 10 percent of refis, in 2000, to $327 billion, or 23 percent of all refi volume, in 2006.

Posted August 4, 2009 8:49 AM

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