Equity Loans as Next Round in Credit Crisis

[nhboy]

"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."

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

[dn0121]

I don't see what the problem is unless you lost your job. You were paying the monthly loan payment all along, why all of a sudden now do you have issues paying? Were you not to smart and borrowed more then you could afford with an adjustable rate? People are dumb, and should be shot that do this.

[somdrenter]

Originally Posted by dn0121

I don't see what the problem is unless you lost your job. You were paying the monthly loan payment all along, why all of a sudden now do you have issues paying?

Say you and your neighbor bought a house around the same time and each paid I dunno, say $400K each. Your neighbor gets into a bind, stops making payments, gets a bail out from any of the alphabet soup organizations and gets his principal lowered to $300K. You’re settled down, gonna be around for a while and not going to purchase another big ticket item anytime soon. What financial incentive do you have to not take a bail out like your neighbor?

[designer300z]

Originally Posted by somdrenter

Say you and your neighbor bought a house around the same time and each paid I dunno, say $400K each. Your neighbor gets into a bind, stops making payments, gets a bail out from any of the alphabet soup organizations and gets his principal lowered to $300K. You’re settled down, gonna be around for a while and not going to purchase another big ticket item anytime soon. What financial incentive do you have to not take a bail out like your neighbor?

I haven't heard of bank dropping the principle due and letting people keep the home, but your concept is accurate. People are finally being forced to stop treating their home like a piggy bank, and it's frustrating to homeowners who played it safe in the boom. Think about it this way: You paid the extra cost to get a fixed rate 2 years ago, while dummy next door went interest only. now dummy is getting a fixed rate through a loan modification, and he's STILL paying a lower rate than you. How does dummy get to make such bad choices and still end up better than you financially? Does he really deserve subsidy?

On the other hand, how much further will your home value fall if another foreclosure hits your street? Is it worth the market falling further and devaluating YOUR investment so that you can feel better knowing they were bailed out of their own stupid financing? Perhaps, but that's an individual concern, and must be weighed on the same basis. It's hard to quantify how much (if any) money an owner stands to lose for each foreclosure they see happen in their area.

[somdrenter]

Originally Posted by designer300z

I haven't heard of bank dropping the principle due and letting people keep the home, but your concept is accurate.

The possibility is there:

One of the suggestions Bernanke made was for mortgage and other financial companies to reduce the amount of the loan to provide relief to a struggling owner. "Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure," Bernanke said.

Bernanke Calls for More Mortgage Relief: Financial News - Yahoo! Finance