How quickly we forget the mistakes of 2008
One of the ways we as a firm have attempted to stop the spread of Covid has been to encourage employees to work from home when it makes sense to do so. Generally, when I am working from home I have the news on in the background.
I am struck by just how much bad financial advice you can get watching commercials on daytime TV. From buying precious metals, to reverse mortgages, to whole life insurance, there is no shortage of financial services vendors plying their wares in between news stories.
One of these commercials currently running is especially troubling however. This particular company (which will remain nameless) is pushing a home loan refinance, targeted to veterans. While refinancing a mortgage during record low rates isn’t necessarily a bad idea, the way in which they structure their loan offer, and what they suggest you do with the cash you receive, is beyond dangerous.
In their ad, which by my count ran well over a dozen times in a single eight-hour workday, a very attractive woman suggests that with home values high and interest rates low, you should refinance your home loan, take the equity out of it and invest those funds in your retirement. The first time I saw the commercial I had to rewind my DVR to make sure I hadn’t misheard her advice. It was that outrageous to me.
Upon arriving at the website they direct you to for more information about this offer, the first thing you see is a banner for this product that boasts no appraisal required, no employment verification and no out-of-pocket costs.
If we should have learned anything from the out-of-control housing market that led to the financial crises of 2008, it was that serious underwriting needs to occur before any home loan is issued. It would appear we did not learn this valuable lesson however.
Sadly, those interested in this offer appear to have also not learned from what happened in 2008, that home values can go down quickly, as can the stock market. Because both of those risks are very real, taking out a huge loan on the equity of a home that is likely sitting at near record high value, and using that money to invest in the stock market, which is also at near record high levels, is a recipe for disaster.
In a perfect world it would be great to capitalize on the increased equity in your home that has occurred because of its increased value, and to then borrow against that value at a very low rate and to grow that money at a much higher rate in the market. But what happens when it’s not a perfect world, and the value of your home goes down, the money you invested in the stock market shows losses, and you suddenly become unemployed?
The likely scenario is that you find yourself unable to make the payments on a home loan you are underwater on, holding illiquid security investments that are worth significantly less than they were when you bought them, and no ability to sell the home and dig out of the financial mess you have made.
Sadly, many will fall for the traps this, and other financial products companies have set. Don’t be one of them. I know it is cliché, but if something sounds too good to be true it probably is. This saying is never truer than when listening to sales pitches from some financial companies.
(Past performance is no guarantee of future results. The advice is general in nature and not intended for specific situations.)
Luke Davis is the director of operations and compliance at Stewardship Capital in Independence.