Mortgage Equity Withdrawal - Are Americans Addicted To It?

By Author: Lawrence Roberts
Total Articles: 4762
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Much of the money homeowners borrowed fueled consumer spending and reinforced poor financial management techniques. It was common during the bubble rally for people to run up enormous credit card bills then refinance every year and pay them off. It is foolish enough to finance consumer spending, but it is even more foolish to pay for this spending over the 30-year term of a typical mortgage. The consumptive value fades quickly, but the debt endures for a very long time.

Many people responded to the "free money" their house was earning by liberating their equity as soon as they could so they could buy cars, take vacations, and generally live the good life. This borrow-and-spend mentality was actually encouraged by lenders who were eager to make these loans and even the government which was benefiting by economic expansion and higher tax receipts.

The recession of 2001 was caused by the collapse of stock prices and the resulting diminishment of corporate investment. The recession was shallow, but the economy had difficulty recovering mostly due to continued erosion of manufacturing jobs. The Federal Reserve under ...
... Alan Greenspan was desperate to reignite economic growth, so the FED funds rate was lowered to 1% and kept there for more than a year. It was hoped this increased liquidity would go into business investment to restart the troubled economy; instead, it went into mortgage loans and consumers' pockets through mortgage equity withdrawal. Basically, the economic recovery from 2001 through 2005 was an illusion creating by excessive borrowing and rampant spending by homeowners. The economy did not grow through production; it grew through consumption.

There are many theories as to the decline and fall of the Roman Empire. One of the more intriguing is the idea that Rome fell because it was weakened by the parasitic nature of Rome itself. Rome existed to consume the resources of the empire. Boats would come to the city loaded with goods and leave the city empty. Consumption kept the masses happy and thereby quelled civil unrest. The Roman Empire was the world's only superpower with an unsurpassed military might. Equally unsurpassed was its ability to consume resources. Does any of this sound like the United States?

The United States has clearly become a consumer nation, and the government continues to borrow huge sums of money to keep the economic engine of consumption going. In early 2008, Congress passed a "stimulus" package where many people would receive direct gifts of money in the hope they would spend it and keep the economy going. Since the Federal Government was already running a deficit, this money was borrowed from future tax receipts. In other words, this handout was obtained from future generations. With house prices crashing, direct handouts of borrowed government money were necessary to make up for the loss of borrowed private sector money that used to be available through mortgage equity withdrawal.

So what happens to Americans when you take away their Mortgage Equity Withdrawal? They experience a severe economic recession rivaling the Great Depression when their borrowing is taken away. Like a drug addict experiencing withdrawals, Americans are going through severe economic pain getting off their mortgage equity withdrawal habit.
About Author:
Lawrence Roberts is the author of The Great Housing Bubble: Why Did House Prices Fall?
Learn more and get FREE eBooks at: http://www.thegreathousingbubble.com/
Read the author's daily dispatches at The Irvine Housing Blog: http://www.irvinehousingblog.com/ Visit Mortgage Equity Withdrawal - Are Americans Addicted to It?.