April 19, 2012

Here’s a conundrum. Our society encourages homeownership — it’s the American dream! —in a variety of ways. But it also encourages us to load up our homes with debt, which, as the financial crisis vividly demonstrated, can result in the loss of homeownership. It’s time for us to choose: a home as a societal ideal or a home as a cash machine.

Over the past few decades, banks have spent billions marketing home equity lines of credit. This changed the image of such loans from a socially unacceptable sign of financial distress — respectable people paid off their mortgages — to a savvy move. Remember Citi’s “Live Richly” campaign? Or PNC Bank’s advertisement that promised the “easiest way to haul money out of your house”?

In the 1990s, subprime mortgages began to proliferate. These, too, mainly allowed people to withdraw equity from their homes, although they were marketed to people with impaired credit. While the target customers for the banks and the early subprime lenders may have been slightly different, their loans had this in common: They were aggressively marketed, and the government encouraged this type of lending by allowing some tax deductibility of the interest on home equity loans.

As the housing bubble grew, home equity loans soared and risky mortgages proliferated. Most subprime loans were “cash out refinancings,” a close cousin of a home equity loan in which you refinance your mortgage for more than you currently owe, then pocket the difference.

We borrow against our homes for frivolous as well as important purposes, such as starting a business. But here’s the thing: In either case, the borrowing is antithetical to our stated goal of homeownership — which, after all, is a goal because it’s supposed to foster roots in a community, and increase stability and financial security. It’s almost the same as if the government promoted retirement savings by allowing you to save tax free (as it does) but then also encouraged you to raid your 401(k) when necessary.

The notion of homeownership is probably too ingrained in our psyche to kill that off. So let’s abolish home equity loans, or at least go back to the old days, when they were the loan of last resort.

Bethany McLean, a contributing editor at Vanity Fair, is co-author with Joe Nocera of “All the Devils Are Here: The Hidden History of the Financial Crisis.”

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