In the wake of the mortgage-refinancing boom of the last few years, Americans own less of their homes today than they did in the 1970s and early ’80s, according to a new report released by Demos, a nonpartisan public policy organization based in New York.

The report, “A House of Cards: Refinancing The American Dream,” found that between 1973 and 2004, homeowner’s equity fell from 68.3 percent to 55 percent.

That’s because millions of homeowners have refinanced their homes in the last three years to pay off credit card debt and cover basic living expenses, according to Javier Silva, author of the report. “If home values bust, many of these homeowners will be devastated,” he said.

The report, based on analysis of government and industry data as well as academic research, provides a comprehensive analysis of the causes and impact of the mortgage-refinancing boom in the United States since 2001. As mortgage interest rates fell to record levels during the refinance boom, many Americans cashed out home equity to pay down debt and finance living expenses – a quick fix that only adds to the long-term economic burdens of the average family, according to the report. The net result: the financial well-being of many Americans is at risk as the refinancing boom has created a blurred line between good debt – debt that results in appreciable asset, such as a house with equity – and bad debt, which does not.

Key findings from the report include:

  • Households cashed out $333 billion worth of equity from homes between 2001 and 2003, the beginning of the refinancing boom – levels three times higher that any period since Freddie Mac started tracking the data in 1993.

  • 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.

  • 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.

  • The rise of appraisal fraud fueled inflated home prices over the last several years, the report states. 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.

One of the most alarming findings in the report is the role that mortgage fraud, in particular appraisal fraud, plays in the refinancing process. There are growing numbers of third-party brokers pressuring appraisers to inflate home values in order to “close the deal” and reap larger fees or bonuses, according to the report. The consequence can be dire for homeowners who refinance and draw out more cash equity than their home is actually worth.

“This is another example of the unethical and often unregulated methods used to capitalize on the financial challenges facing millions. Many people are defrauded into borrowing more than the fair market value of their homes. They will find themselves in an economic crisis if and when the housing bubble bursts,” Silva said.

The report suggests reforms that would have immediate and long-lasting impact, including enacting legislation that would ensure borrowers are protected from excessive rates, fees and capricious changes in account terms; enacting a national usury law that would prohibit today’s penalty interest rates of 30 percent or higher; maintaining existing bankruptcy laws for individuals in severe economic distress; and more aggressive protection against appraisal fraud.


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