A House of Cards
Refinancing The American Dream
January 9, 2005
By Javier Silva

View the document 2 (pdf)

"A House of Cards" is the third in a series of Borrowing to Make Ends Meet Briefing Papers. Since the refinancing boom began in 2001, American homeowners have cashed out over $330 billion in home equity to cover rising living expenses and credit card debt, putting at risk their most important asset - their home.

Refinance Boom Could Spell Disaster For Millions of Homeowners And Fuel "Housing Bubble" Crisis, Report Finds Americans Cashed Out $330+ Billion In Home Equity Since 2001 Under Pressure From Skyrocketing Living Expenses, Credit Card Debt, Fraud and Aggressive Marketing >Read Press Release>

A majority of households that refinanced between 2001 and 2003 used cash equity from their homes to cover living expenses and pay down credit card debt, further eroding their home's cash value, which many families rely on for economic security.

Between 1973 and 2004, homeowners' equity actually fell -- from 68.3 percent to 55 percent. In other words, Americans own less of their homes today than they did in the 1970s and early 1980s.

In 2002, the financial obligations ratio -- the percentage of monthly income to the amount needed to manage monthly debt payments -- reached 18.56 percent, a single year record since data started being collected in 1980.

As the Federal Reserve continues to raise interest rates, a mortgaged family with an adjustable rate mortgage will experience a significant increase in their monthly mortgage payments. The combination of higher mortgage payments coupled with rising costs of basic living expenses represents a growing financial threat.

The rise of appraisal fraud has fueled inflated home prices over the last several years. Even though it is underreported, appraisal fraud was the fastest type of mortgage fraud reported by major lenders in 2000, and could leave many homeowners owing much more than the true market value of their home.

Homeowners who reduced their homes' equity during the refinance boom could suffer devastating effects if home prices begin to fall. As a result, a homeowner could owe more on their mortgage than the house is worth -- known in the industry as being "upside down" in a house.