weekend commentary - banks now blocking some home sales due to home equity problems
(snip)"March 27, 2008
Equity Loans as Next Round in Credit Crisis
By VIKAS BAJAJ
NY Times
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.
It is a remarkable turnabout for the many Americans who have come to regard a home as an A.T.M. with three bedrooms and 1.5 baths. When times were good, they borrowed against their homes to pay for all sorts of things, from new cars to college educations to a home theater.
Lenders also encouraged many aspiring homeowners to take out not one but two mortgages simultaneously — ordinary ones plus “piggyback” loans — to avoid putting any cash down.
The result is a nation that only half-owns its homes. While homeownership climbed to record heights in recent years, home equity — the value of the properties minus the mortgages against them — has fallen below 50 percent for the first time, according to the Federal Reserve.
Lenders holding first mortgages get first dibs on borrowers' cash or on the homes should people fall behind on their payments. Banks that made home equity loans are second in line. This arrangement sometimes pits one lender against another.
When borrowers default on their mortgages, lenders foreclose and sell the homes to recoup their money. But when homes sell for less than the value of their mortgages and home equity loans — a situation known as a short sale — lenders with first liens must be compensated fully before holders of second or third liens get a dime.
In places like California, Nevada, Arizona and Florida, where home prices have fallen significantly, second-lien holders can be left with little or nothing once first mortgages are paid.
In December, 5.7 percent of home equity lines of credit were delinquent or in default, up from 4.5 percent in 2006, according to Moody's Economy.com.
Lenders and investors who hold home equity loans are not giving up easily, however. Instead, they are opposing short sales. And some banks holding second liens are also opposing refinancings for first mortgages, a little-used power they have under the law, in an effort to force borrowers to pay down their loans.
“Acknowledging a loss is the most difficult thing to do,” said Micheal Thompson, the executive director of the Iowa Mediation Service, which has been working with delinquent borrowers and lenders. “You have to deal with the reality of what you are facing today.”
While he has been able to strike some deals, Mr. Thompson said that many mortgage companies he talks with refuse to compromise. Holders of second mortgages often agree to short sales and other changes only if first-lien holders pay them a small sum, say $10,000, or 10 percent, on a $100,000 debt.
Disagreements arise when the first and second liens are held by different banks or investors. If one lender holds both debts, it is in their interest to find a solution.
When deals cannot be worked out, second-lien holders can pursue the outstanding balance even after foreclosure, sometimes through collection agencies. The soured home equity debts can linger on credit records and make it harder for people to borrow in the future.
Experts say it is in everyone's interest to settle these loans, but doing so is not always easy. Consider Randy and Dawn McLain of Phoenix. The couple decided to sell their home after falling behind on their first mortgage from Chase and a home equity line of credit from CitiFinancial last year, after Randy McLain retired because of a back injury. The couple owed $370,000 in total.
After three months, the couple found a buyer willing to pay about $300,000 for their home — a figure representing an 18 percent decline in the value of their home since January 2007, when they took out their home equity credit line. (Single-family home prices in Phoenix have fallen about 18 percent since the summer of 2006, according to the Standard & Poor's Case-Shiller index.)
CitiFinancial, which was owed $95,500, rejected the offer because it would have paid off the first mortgage in full but would have left it with a mere $1,000, after fees and closing costs, on the credit line. The real estate agents who worked on the sale say that deal is still better than the one the lender would get if the home was foreclosed on and sold at an auction in a few months.
“If it goes into foreclosure, which it is very likely to do anyway, you wouldn't get anything,” said J. D. Dougherty, a real estate agent who represented the buyer on the transaction.
Mark Rodgers, a spokesman for CitiFinancial, declined to comment on the McLains' situation, citing privacy considerations.
“We strive to find solutions that are acceptable to the various parties involved,” he said but two lenders can “value the property differently.”
Other lenders like National City, the bank based in Cleveland, have blocked homeowners from refinancing first mortgages unless the borrowers pay off the second lien held by the bank first. But such tactics carry significant risk, said Michael Youngblood, a portfolio manager and analyst at Friedman, Billings, Ramsey, the securities firm. “It might also impel the borrower to file for bankruptcy,” and a judge could write down the value of the second mortgage, he said.
A spokeswoman for National City, Kristen Baird Adams, said the policy applied only to home equity loans originated by mortgage brokers.
Underscoring the difficulties likely to arise from home equity loans, a Democratic proposal in Congress to refinance troubled mortgages and provide them with government backing specifically excludes second liens. Lenders holding a second lien would be required to write off their debts before the first loan could be refinanced. That could leave out a significant number of loans, analysts say.
People with weak, or subprime, credit could be hurt the most. More than a third of all subprime loans made in 2006 had associated second-lien debt, up from 17 percent in 2000, according to Credit Suisse. And many people added second loans after taking out first mortgages, so it is impossible to say for certain how many homeowners have multiple liens on their properties. "(snip)
Re: weekend commentary - banks now blocking some home sales due to home equity proble
Why do you spend so much time on those hokey the sky is falling banker's conspiracy web sites? :)
Re: weekend commentary - banks now blocking some home sales due to home equity proble
^^^ well, even though it hasn't received much mainstream publicity (forcing me to wind up at 'hokey' websites to find news coverage - in this case the 'hokey' New York Times), the ability and apparent willingness of second lein holders to block the short sales and re-fi's of underwater' homes is going to greatly intensify homeowner liquidity / solvency problems.
As to any pertinent 'conspiracy theory', there is one of course. With HELOC credit limits now being essentially dropped to zero, lots of homeowners are now facing a severe liquidity problem. Actually it's really a solvency problem, but until now distressed homeowners still had the HELOC route open to them with which to raise cash to pay their primary obligations (i.e. first mortgage payments, car payments etc.). The reason that HELOC credit limits were dropped to nothing is a growing two pronged trend by secondary lenders to attempt to cut their upcoming losses.
#1 is that any gov't mortgage bailout plan currently under discussion will NOT allow a single dollar of bailout money to go toward a secondary mortgage or HE loan, only the primary mortgage loan ... causing the secondary lenders to fear they will be kneecapped in the bailout process. So the secondary lenders are 'creating' problems in order to be noticed by gov't bailout legislators !
#2 is that short sales cause much higher losses for secondary lenders than for primary lenders, bankruptcies dause much higher losses for secondary lenders than for primary lenders etc. Thus the secondary lenders are 'lobbying' for equal consideration in any upcoming gov't bailout plan, and for equal consideration in bankruptcy court (i.e. a proportional split of remaining home equity with the primary and other secondary lenders, instead of primary lender takes all, in an underwater situation).
~
Re: weekend commentary - banks now blocking some home sales due to home equity proble
After the HELOCs come the credit cards I say...
Apparently Britain is having a joyful time with them now.
Re: weekend commentary - banks now blocking some home sales due to home equity proble
^^^ actually, US credit card delinquencies are at record levels already.
Perhaps more importantly from the standpoint of a troubled homeowner seeking quick liquidity to avoid foreclosure / bankruptcy, credit card lenders have already tightened up creditworthiness requirements on the approval of new credit card accounts, credit card lenders have already jacked up both 'normal' and penalty interest rates, in some cases credit card lenders have already dropped credit limits etc. The credit card lenders started doing this in earnest last fall right after the liquidity crisis / market downturn - so in that sense the recent HELOC lender actions are actually 'late to the party'.
The 'tin foil hat' crowd is now saying that, with HELOC credit lines now evaporating, troubled 'Joe Sixpack's now have just one source of liquidity left ... which they are now beginning to tap in earnest. I'm referring to taking out loans against 401k retirement account holdings. This latest development of course involves major new systemic risks too.
If a person has 'borrowed down' their 401k account and loses their job, if they do not have the cash to repay the 401k loan immediately (which they won't) it will force the 401k plan to sell off stocks and bonds held in their 401k to satisfy the loan. This situation also brings into play nasty tax consequences as deferred income taxes on the 401k assets become immediately due and payable upon the forced sale. Of course, if enough 'Joe Sixpacks' have this happen to them, it's entirely possible that the US gov't will change the tax laws (as they already did with 'subprime' home foreclosures and taxes due on the forgiven 'debt').