Fighting Max-Mortgage Madness

This is a tall order. The word "financial crisis" is circulating as if it were common coin. So consumers are searching hard for safe financial havens. If they mostly or only hear calls to max out mortgages and equity loans, some may do just that.

CMPS does use some pretty strong wording, after all. If liquidity is needed, it warns, "the worst thing you can do in this environment is dump more of your cash into your home equity because you may not be about to get access to it if you run into financial difficulties, if the housing market continues to decline, or if the credit crunch gets worse.

"Although it sounds counter-intuitive, you should have as big a mortgage as possible–even if you don't need it–and leave as much cash as possible in a safe, liquid place that is readily available to you. This empowers you to weather the storm and also have your funds available to take advantage of bargain opportunities that are becoming available because others have not followed this advice. In this environment, the one with the most cash wins."

Now, the idea of freeing up cash to meet unforeseen needs or to take advantage of "bargain opportunities" is surely tantalizing. But the max-mortgage suggestion says nothing about the costs–or risks–of this particular brand of "freedom."

Omitted are references to: the closing, insurance and other charges for setting up a new or second mortgage, the crimp on cash flow caused by out-sized mortgage payments, the continuing undertow on financial choice caused by keeping up a long-term mortgage, the stress on family life caused by that undertow, and the lack of security in knowing a home is paid for or soon will be (particularly if prepaying).

Besides, just how many people will actually take those freed-up funds to finance "bargain opportunities?" Probably very few. Maybe even fewer that the number of life insurance buyers who failed to invest after adopting the much-touted "buy term and invest the rest" strategy.

This is not the first time the insurance and financial sector has competed head on with max-mortgage promoters. In the go-go 1990s, mortgage-to-the-max was "in," especially among entrepreneurial types who used the leverage to back their oh-so-hot deals, some of which later went kaput. In the early- to mid-2000s, it cycled around again, especially among "investor-homeowners" who leveraged home equity for funds to invest in properties destined for flipping or renting, only to lose out in the subprime meltdown.

To be sure, CMPS has some sound ideas, too–e.g., be sure investments are protected via the Securities Investor Protection Corp., and bank accounts via the Federal Deposit Insurance Corp.

But its max-mortgage idea should be deep-sixed. Insurance and financial advisors have more clear-eyed solutions. I say, let 'em rip.