Thursday, 20 January 2011

The HELOC - Every bit as nasty as it sounds

At 10:45 a.m. this morning, the most viewed article on globeandmail.com came from a column in its venerable business section written by columnist Rob Carrick called "In defence of the much maligned HELOC" (Home Equity Line of Credit).

I recognized both the columnist's name and the dicey financial vehicle he was referring to, blamed for much of the real estate bubble fallout that was a major contributing factor to the financial crisis of '08. The product, I can tell you from first hand experience of having serviced it myself, is almost as dangerous as it sounds, combining the gargantuan proportions of He-man with the death-grip into submission pain of a leg-lock in a UFC bout. It is generally a recourse for people who are either in too deep or after more credit/goodies. So I looked forward, as I contributed to the article's #1 rating by clicking on it myself, to reading a thorough and carefully argued contrarian point of view on something which is generally regarded as irresponsible and bad (borrowing against the value of something you barely own to begin with...hmm).

It turned out that I could not count on any such alternative to the dominant viewpoint, simply because none exists. If Mr. Carrick is not directly on the payroll of the "pushers" (my not-so-affectionate term for Canada's big banks), then he may want to let them know he is doing some great unpaid volunteer work for them. His article was not too long and this post isn't going to be either, but I had to call out a couple of his ridiculous arguments.

It's better to borrow on a HELOC at 3 or 4 percent than a credit card at 19%. So transfer your credit card debt to it.

Wow, that's so logical I can't believe how much sense it makes. Except for the fact that he glosses over so innocently, that this hypothetical borrower he is counselling is racking up credit card bills they can't afford while carrying a house, property taxes, and the whole shebang of expenses that come with. My question to a person like that would be "WHAT THE HELL ARE YOU DOING CARRYING A BALANCE ON YOUR CREDIT CARD EVERY MONTH?! ARE YOU INSANE?"
Chances are if that person didn't have a problem running up a bill they couldn't afford once, they aren't going to mind doing it again after this bailout that has the appearance of a freebie. The whole point of financial education is to teach people so they don't repeat the same mistakes. So it sounds to me like this HELOC solution is a slap on the wrist that is begging to create a repeat offender. The reaction we want from this person is "gee, it sure sucks paying all this interest" not "oh cool, there's a sale at best buy this weekend."

Low rates of HELOCs offer great oppurtunities to invest in property, stocks, or business ventures.

Yes, they also offer great oppurtunities to go to casino and put 10K chips on black 27 at the roulette table. 35 to 1 odds, can't go wrong. Except that you can. Because you are taking huge risks. With money that isn't yours. So not only could you lose money for no reason, you could lose someone else's money that you then have to pay back for no reason. Sounds like a slam dunk to me, Rob.

Borrowing is bad, we get it, now governments can stop scolding the financial children out there, because adults know how to look after their own debt.

Taking the time to ask for conversation and debate about something before it is universally condemned is a very adult thing to do, yes. Encouraging people to spread themselves ever so thin on the basis of magical and unrealistic thinking is not. Collective memories are very short these days and the author of the article seems to be in the growing ranks of those who want to forget what happened as fast as possible and get back to "business as usual". That's fine, but I'm sorry to inform him that I'll have to deny his claim to the "adult" high ground. Learning from mistakes, waiting for and earning things you want instead of demanding them right now, gaining appreciated of the value of a dollar, and not being reckless are time-tested ways to stay out of the dog poo. Lessons we want for all of our children, and lessons the columnist seem to be telling a group of adults they can afford to ignore. Just driving them back into the arms of the rich uncles that spoil them, the big banks. Except when you're a grown-up, which these people technically are in age and appearance, you have to pay your uncle who makes all your dreams come true back. In full. With interest. The preying on dumb adult minds by exploiting the most common ailment of our era, childish and irresponsible thinking and reasoning, by people like this columnist has got to stop.

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