Tuesday, December 18, 2012

A Wal-Mart Mortgage in the Distant Future? ... If So, a Good or a Bad Thing?

Housing has bottomed and price increases are on the rise. Home sales are picking up as well.

And one in three people would be interested in getting their next mortgage from -- Wal-Mart.

Is a down the road Wal-Mart potential mortgage offering a good idea or a bad idea? My answer is that would depend on how knowledgeable We the People are at the time and how self reliant we become.

Wal-Mart mortgages could fuel the next bubble is subtitled 'We want convenience, but what would it cost us?' Here's what it says in part:

"Too bad Wal-Mart doesn’t offer mortgages. . . . one out of three people would consider taking out a mortgage at Wal-Mart according to a survey released Monday by Carlisle & Gallagher Consulting Group. . . .

“The average consumer goes into a bank a lot less often than a Costco or a Wal-Mart,” said Doug Hautop, the firm’s lending practice leader, in a telephone interview.

Wal-Mart offers an array of relatively simple financial services, including checking, credit cards, money transfers, and it will do your tax returns, too. Its Sam’s Club warehouse stores even make small business loans. But if Wal-Mart were to make it big in the mortgage-lending business, the Earth might just tip on its axis.

Critics have long complained of Wal-Mart as a global distribution network for China. It’s where Americans demanding “always the low price” send their money. China then buys U.S. Treasuries, pushing down interest rates for everything, including home loans. This helps make it possible for consumers to tap their home-equity lines and go shopping yet again.

The fear is that if this cycle continues, indefinitely, China will end up with all the money, and we will end up with all the debt and a lot of cheap, plastic stuff we’ll need to bury in a landfill. This fear may be a bit overstated. But anyone who thinks the mortgage-lending bubble couldn’t happen again isn’t watching it already starting to happen again.

“Home-equity lines of credit that fueled a spending spree during the U.S. property boom are back,” according to a recent article by Bloomberg News.

The report cited numbers from Moody’s Corp., showing that lending on home equity lines of credit, or Helocs, will rise 30%, to $79.6 billion in 2012, the highest since the 2008 financial crisis. Moody’s expects this number will jump another 31% next year.

Interest rates are at all-time lows and even a sluggishly recovering housing market has left millions of consumers with home equity to tap. So why not tap it all now and spend it for Christmas?

Cheap interest rates created the first bubble. Even lower interest rates could create the second.

In many markets, it is getting to be more expensive to rent a home than to buy one, a cash-flow spread that will entice more everyday people into the housing market as investors.

Consumers like the idea of Wal-Mart as a mortgage lender because they think the discounter can make mortgages cheaper and faster than banks, according to the C&G survey. Another place they would like to be able to get a mortgage — but, as yet, can’t — is PayPal.

The last crisis made me want to scream, “Hey, where’d you get that lousy home mortgage? Kmart?” Maybe after the next crisis it won’t be a joke.

Houtop said the kinds of mortgages retail lenders would make would be simple and straight-forward, not the exotic varieties of stated-income loans and sneaky balloon notes that the banking industry continues cleaning up to this day.

Still, if the financial crisis taught us anything, it should be that shopping for a new home-equity line should not be as easy as driving to Wal-Mart.

Consumers still don’t get enough blame for the housing crisis that nearly brought America’s economy to its knees.

Brokers, lenders, Wall Street bankers, politicians, Fannie and Freddie — they rightly receive their share. And to be sure, what really tanked the market, was the trillions in troubled mortgage-backed securities and derivatives — not so much the billions in defaults from homeowners. But in the end, it is one long chain of fools that began with a home-buying public that now wants to shop for mortgages at Wal-Mart.

They scantly remember it was non-bank lenders — particularly Countrywide Financial — that made the most dubious loans and did the most damage. But according to the survey, 80% consumers would consider a mortgage from a non-bank.

Too many Americans apparently still cling to the discredited belief that a home’s value can only go up. And that it’s not just a place to live, it’s a poker chip.

According to the survey, 53% say a home is one’s most important investment; 46% expect their home values to grow significantly over time; and only 4% believe their home value will decline over time.

It makes me want to hang a for-sale sign on my house to see what I can get. Some consumers are just begging for another housing bubble, and they want Wal-Mart to help them blow it."

Summing Up

Low interest rates make housing more affordable. The opposite is equally true.

Thus, if a buyer today intends to sell again within a decade or so, the odds are that interest rates will be considerably higher for the next buyer. Thus, all other things being equal, housing will then be less affordable than it is today.

That in turn will reduce the future selling price of the house from what it otherwise would be.

So whether we get our mortgage from Wal-Mart, a bank or somebody else isn't the issue.

The issue is whether we've thought through the longer term situation properly and are prepared to take on what will probably amount to the biggest debt in our lifetime.

And whether we will have both staying power and the ongoing ability to service the mortgage debt, even if things get tough for us down the road.

And if we won't stay put for more than seven years, the average home ownership period, does it really make sense to take the plunge? Isn't it more speculative than what we've been led to believe?

And if so, why take the chance of losing all our money and destroying our ability to build some long term wealth by saving and investing?

Homes are great places to live but poor places to invest, especially if we have to borrow more than we should to make the deal on a high end 'dream' house that we really can't afford.

Sometimes dreams become nightmares.

Let the buyer beware!

Thanks. Bob.


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