Home Equity Line Of Credit Struggles: Still More Mortgage And Housing Woe Fallout
Sharon L. Secor
August 14, 2008
With banks and other lenders reeling from the fall-out of both the mortgage and lending meltdown and the bursting of the housing bubble with its resulting home price correction, most economists and financial experts in the know predicted that turmoil would spread to other financial markets and types of credit. And, as was expected, there has been a tightening up of credit, though the reduction of low or no standard loans isn´t really a bad thing, over the long-term. However, the tightening hasn´t only affected sub-prime loans or lending outside of the traditional standards. It is creeping into the higher realms of the market, as well, affecting a broad range of credit options, including the home equity line of credit.
As the name indicates, the housing market and a home equity line of credit are tightly intertwined, as it is the value of the equity in the home that serves as the foundation of the line of credit. With home values falling, homeowners are experiencing a decrease of home equity. Unfortunately, many homeowners are finding themselves in the unenviable position of being upside-down on their mortgages, as the loss of value has tipped the equity balance against them. This is especially difficult in the case of those who´d already borrowed significantly against that equity, leaving little or none not tied up in debt.
The number of people in this predicament is on the rise. According to a recent report by Zillow, an on-line real estate service, 45 percent of those who bought their home in 2006 are in the position of being upside-down on their mortgages, owing more than the home is now worth. Just shy of one third of those who bought homes in 2003 are in the same position. The most shocking numbers in the report come out of Stockton, known now as the foreclosure capital of the nation – 95 percent of homeowners that bought in 2006 now owe more on their mortgages than their homes are worth.
Needless to say, this recent rash of numbers has done nothing to soothe nervous lenders, especially those with fingers in more than one lending pie. Lenders who are dealing in multiple types of lending – mortgages, credit cards, business loans, etc. – and already experiencing tremendous losses from mortgage defaults and rising credit card defaults are anxiously eyeing their home equity line of credit lending, and doing hasty reassessments of their borrowers. Headlines are full of sudden home equity line of credit reductions, happening even to those with good credit scores, with some lenders seeming to be making moves towards backing completely out of that type of lending.
According to a recent Barron´s report , "standards for home equity lines of credit were tightened by 80% of the banks in the survey, up from 70% in April. Only 10% reported weaker demand for HELOCs, down from 20% in the prior survey, so homeowners continue to want to tap their houses as if they were ATMs." With credit tightening up, borrowers are continuing to engage in what in today´s climate is risky behavior, using their home as a source of funding. While in some circumstances that may be a risk well worth taking, in the case of a number of borrowers, home equity lines of credit are being used to pay day-to-day bills that cannot be met in the usual way or to fund nonessential consumption that may one day come back to bite them.
The current stress and strain in the credit market is going to be with us for a while, as the wind down of the mortgage and lending meltdown and the housing market correction still has not been completed. When borrowing against real assets, such as via a home equity line of credit or with a home equity loan , in today´s economic climate, the smart borrower thinks long and hard about the decision. After all, if there is one thing that we all should have learned from the recent situation in the sub-prime mortgage and lending markets, just because a lender will make a loan doesn´t make it smart to borrow.
As the name indicates, the housing market and a home equity line of credit are tightly intertwined, as it is the value of the equity in the home that serves as the foundation of the line of credit. With home values falling, homeowners are experiencing a decrease of home equity. Unfortunately, many homeowners are finding themselves in the unenviable position of being upside-down on their mortgages, as the loss of value has tipped the equity balance against them. This is especially difficult in the case of those who´d already borrowed significantly against that equity, leaving little or none not tied up in debt.
The number of people in this predicament is on the rise. According to a recent report by Zillow, an on-line real estate service, 45 percent of those who bought their home in 2006 are in the position of being upside-down on their mortgages, owing more than the home is now worth. Just shy of one third of those who bought homes in 2003 are in the same position. The most shocking numbers in the report come out of Stockton, known now as the foreclosure capital of the nation – 95 percent of homeowners that bought in 2006 now owe more on their mortgages than their homes are worth.
Needless to say, this recent rash of numbers has done nothing to soothe nervous lenders, especially those with fingers in more than one lending pie. Lenders who are dealing in multiple types of lending – mortgages, credit cards, business loans, etc. – and already experiencing tremendous losses from mortgage defaults and rising credit card defaults are anxiously eyeing their home equity line of credit lending, and doing hasty reassessments of their borrowers. Headlines are full of sudden home equity line of credit reductions, happening even to those with good credit scores, with some lenders seeming to be making moves towards backing completely out of that type of lending.
According to a recent Barron´s report , "standards for home equity lines of credit were tightened by 80% of the banks in the survey, up from 70% in April. Only 10% reported weaker demand for HELOCs, down from 20% in the prior survey, so homeowners continue to want to tap their houses as if they were ATMs." With credit tightening up, borrowers are continuing to engage in what in today´s climate is risky behavior, using their home as a source of funding. While in some circumstances that may be a risk well worth taking, in the case of a number of borrowers, home equity lines of credit are being used to pay day-to-day bills that cannot be met in the usual way or to fund nonessential consumption that may one day come back to bite them.
The current stress and strain in the credit market is going to be with us for a while, as the wind down of the mortgage and lending meltdown and the housing market correction still has not been completed. When borrowing against real assets, such as via a home equity line of credit or with a home equity loan , in today´s economic climate, the smart borrower thinks long and hard about the decision. After all, if there is one thing that we all should have learned from the recent situation in the sub-prime mortgage and lending markets, just because a lender will make a loan doesn´t make it smart to borrow.
Print
Email
