Home Equity Lifts Many in Down Times

The hillside house Linda Lutz has lived in for 25 years isn’t only her home. It’s her bank too.

The character actress has had little work in recent years, but she has been able to cover her expenses by cashing in on the equity of her house in Encinitas in northern San Diego County. In September, Lutz refinanced for the sixth time in five years, taking out $100,000 from the contemporary-style residence within a mile of the ocean.

“Every time I thought we had tapped out, the property value had increased again,” said Lutz, 55, whose acting career has been on hold since she suffered a stroke in 1997. Without refinancing, she said, “I would have been out on the street.”

Southern California’s booming real estate market has come to the rescue of countless homeowners such as Lutz. Despite long stretches of unemployment and depleted savings accounts, many people have stayed afloat in this difficult economy by drawing out cash from their rapidly appreciating homes. It’s helped some avoid a trip to Bankruptcy Court, and others have skirted foreclosure by making their mortgage payments with home equity loans.

Some fear the consequences of homeowners’ draining their equity and the fallout from a potential decline in property values or a jump in interest rates. But it’s clear that many individuals -- and the economy as a whole -- would have been worse off without the ability of folks to capitalize on the real estate prosperity by refinancing or selling their houses at top dollar.

“The fact that people were able to tap into the equity kept the economy above water,” said Esmael Adibi, an economist at Chapman University in Orange. “It would have been devastating” without that cushion.

Nationwide, capital gains on home sales, cash taken out from mortgage refinancings and home equity loans totaled about $700 billion last year, according to the Federal Reserve. Goldman, Sachs & Co. estimated that home equity withdrawals, or “cash-outs,” accounted for half the rise in household spending since 2000, and Federal Reserve Chairman Alan Greenspan has said the money that homeowners saved from refinancing -- by lowering their mortgage payments -- helped minimize stock market declines.

“Equity is doing a lot of things for people right now,” said Coldwell Banker real estate agent Joe Hernandez, who has helped some of his Los Angeles-area clients sell homes to deal with mounting debt, health problems and unemployment. “The benefits of this crazy market have allowed them to walk away with $50,000 and $60,000. It’s going to help more people as long as prices continue to go up.”

Despite a sluggish economy, home values in Southern California show few signs of weakening, thanks to low interest rates and lean supplies. It’s a big change from the recession of the early 1990s, when the region’s real estate bust only compounded economic problems.

Because home values fell sharply then, many homeowners who lost their jobs couldn’t refinance or sell at the right price. Tens of thousands lost their homes to the bank. During that period, only about half of the California homeowners who went into default on their mortgage loans were able to avoid a foreclosure sale, according to DataQuick Information Systems, a real estate research company.

“The lack of equity was a big factor -- it was not there for them,” said Dianne Wilkman, president of Springboard, a nonprofit credit counseling service based in Riverside.

But now, with home prices continuing to rise, many borrowers are able to stave off foreclosures by pulling out equity or by working out delayed payments with lenders.

In the first quarter of this year, only 20% of homeowners who received notices of default -- the first stage in the foreclosure process -- were forced into a bank sale.

Financial advisors and credit counselors know firsthand that equity has been a savior for many distressed Southern Californians. About twice a week, clients of the Los Angeles office of Consumer Credit Counseling send in large checks to repay their debt outstanding, said Richard Pittman, director of counseling and housing.

“People on average send us checks for $350 to $400 a month and suddenly we get a check for $30,000,” Pittman said. “Every time interest rates go down we get another batch of payments like that.”

The economy still was flourishing in 2000 when Karen, a 43-year-old recruitment consultant, bought a three-bedroom condominium in Azusa for $141,000. But as times started to get tough, companies put the brakes on hiring and had less need of her services. The divorced mother of three increasingly strained to come up with the $1,400 for her monthly mortgage payment and condo association fees.

“Every few months I was struggling to try and figure out how to make the payment,” said Karen, who did not want her last name revealed. “I was either going to sell this house, or the bank was going to sell it for me.”

She put her condominium on the market and was shocked when it sold in six days at its asking price of $190,000 -- a 35% increase in less than three years.

“It gives us a chance to start fresh,” said Karen, who moved her family into a rented house nearby and recently started a full-time job. “I avoided going into foreclosure, paid off some debt and saved a little nest egg. It worked out for me.”

More homeowners will no doubt come under greater pressure to sell, especially if the weak economy and labor market persist. Government officials said Friday that the state lost another 13,100 jobs in April. The share of jobless Californians who have been out of work for more than six months jumped to 22% this spring, from 14% a year earlier. The labor market remains particularly grim in Northern California, but the real estate market has held up fairly well, providing a cushion for many families.

In the Bay Area, Michael Roberts and his family put their San Rafael home on the market last month after the 49-year-old information technology consultant watched his income fall by 50% since 2000. The three-bedroom house sold for about $627,000, almost double what Roberts paid for it four years ago.

The sale netted about $270,000, a windfall Roberts plans on using to relocate himself, his wife Mirella and their six-year-old daughter Bianca, to Boca Raton, Fla., where the couple has family and employment prospects look brighter.

“I sort of have been using up my savings over the years to make ends meet. There seemed to be nothing left to do,” said Roberts, whose family is living in a short-term rental until they depart for Florida next month.

Others haven’t reached the point of being forced to sell their houses. But for the unemployed who have tapped their equity, the question is: How long will the money from their homes tide them over before they are employed again?

Many credit counselors and financial advisors also worry that too many homeowners are taking out their home equity without cutting back on the spending and borrowing that got them into trouble in the first place.

In some desperate cases, mortgage brokers say, people are taking cash out of their homes to keep current on their mortgage payments. It’s a strategy that can buy some time but usually proves to be disastrous in the long run.

“That’s a one-way ticket to financial ruin,” said Los Angeles mortgage broker Ted Grose. “When you do that, you are pyramiding debt.”

Nonetheless, with property values continuing to rise and mortgage rates remaining low -- the average 30-year fixed rate was 5.62% last week -- many struggling homeowners will be sorely tempted to squeeze more money from their one, and often only, asset.

Lutz, the Encinitas actress, said she was concerned about piling up more debt and hoped her last batch of refinancing cash would give her enough time to rebuild her career, which has included roles in film, television and commercials.

Yet she said her only financial resource is her home.

“Hopefully, we won’t have to do it again,” Lutz said of taking cash out. “But the property values have gone up again since last September.”