When Will They Ever Learn

Earlier today I saw an advertisement, on MSN.com, for Lending Tree. The ad said “IF YOU BOUGHT YOU HOME BEFORE….YOU CAN TAKE CASH VALUE OUT OF IT TODAY”. (or similar wording). My problem with this ad is that the thinking displayed here is part of what  set off the great recession.

When congress eliminated the tax deduction for interest with the exception of Mortgage Interest, bank and bank like institutions started to hawk Second Mortgages and tied other debt (eg. Credit cards) to home equity. The selling point was ..why wait until you sell to get the value out of your home. Its value has grown take your equity out now though either refinancing or home equity loans…. 

When the housing boom took off many people followed this advice and borrowed against their equity. When the housing crunch hit, many people found that they now owed more on their homes than the houses were worth. They were underwater. The home owners now had less wealth and, as a result, reduced their spending. This reduction in demand led to the Great Recession.

Now, we are again finding lenders pushing people to turn their home equity into cash. Will we be starting the cycle all over again? Just as was said in the song Where Have All The Flowers Gone: “When will they ever learn.” In an age of deregulation, if there is money to be made while creating a crisis, there are firms and individuals who will create a crisis to earn profits.