Equity Loans as Next Round in Credit Crisis

[Purveyor]

Little by little, millions of Americans surrendered equity in their homes in recent years. Lulled by good times, they borrowed — sometimes heavily — against the roofs over their heads.

Now the bill is coming due. As the housing market spirals downward, home equity loans, which turn home sweet home into cash sweet cash, are becoming the next flash point in the mortgage crisis.

Americans owe a staggering $1.1 trillion on home equity loans — and banks are increasingly worried they may not get some of that money back.

To get it, many lenders are taking the extraordinary step of preventing some people from selling their homes or refinancing their mortgages unless they pay off all or part of their home equity loans first. In the past, when home prices were not falling, lenders did not resort to these measures.

Such tactics are impeding efforts by policy makers to help struggling homeowners get easier terms on their mortgages and stem the rising tide of foreclosures. But at a time when each day seems to bring more bad news for the financial industry, lenders defend the hard-nosed maneuvers as a way to keep their own losses from deepening.

---EOE---

http://www.nytimes.com/2008/03/27/business/27loan.html?hp

[HereSince1628]

1. Remember the farm foreclosures? Farmers encouraged to acquire more land

and bigger equipment, mostly against the collateral of their land, and then ooops the market drops, the loans were called and the land was scooped up by huge corporations.

This is gonna work out about like that.

[DJ13]

2. "Lulled by good times......"

What a load of crap.

They were forced into tapping equity because wages were declining as inflation was heating up.

Good times, lol.

:rofl:

[alstephenson]

3. What am I missing here? A home equity loan is secured...

by a second lien position, so the lien would have to be paid off before the home is sold or refinanced. That's not an extraordinary step, it's always been that way. Otherwise you can't convey clear title to a buyer if the home is sold or provide a perfected first lien position to another lender if refinanced. The sale proceeds or the loan proceeds from a refinance are supposed to provide the takeout for all liens against the property. This isn't a "tactic" or a "hard-nosed maneuver", it is a fundamental term of a home equity loan. The point about the home equity lender being the last to get paid off and most likely to have to discount the debt is true, but I think this article is very misleading in some respects. I'm not defending the lenders or the unregulated financial markets that contributed to this whole debacle, I just don't think the article presented the home equity loan problem very well.