Lenders Rethinking Home-Equity Loans

Since delinquencies are on the rise in some markets, it looks like some companies are just walking away instead of foreclosing and then other lenders are getting stingy with borrowers.

This tightening bind between home-equity lenders and borrowers is coming from a combination of falling home prices and rising delinquencies however, since we’re not experiencing falling prices in the Boulder real estate market, take some of this news with a grain of salt.

In markets where home prices are falling, more mortgage companies are waling away from delinquent home-equity loans instead of pushing borrowers into foreclosure. Guess it makes sense since there’s nothing for them to gain except some costs associated with kicking someone out of their house.

They’re most likely better off forgiving the loan rather than foreclosing since to get the property they’d have to spend the time and money to cover the cost of the first loan as well. With falling housing prices, they’d likely not recoup the total $ invested when trying to sell the home again on the market.

This doesn’t mean that the customer doesn’t owe the money, it just means that it’s no longer an asset on the bank’s books. Borrowers shouldn’t misunderstand that they’re ‘off the hook’ for the money. The lien will still be on the property and it won’t be sold without satisfying the lien somehow.

If the borrower decides to refinance or sell, there will still be money owed and in Colorado, a title company won’t give clear title to a new owner without clearing this up. However, this can turn into a good thing for a ‘home-owner’ / borrower if they plan to stay in the home for a while. There’s some chance that the ‘down’ market will recover and by staying put for a few years, perhaps the market price will come back up and a final sale price at a later date will be enough to satisfy both loans.

This is a good lesson for homeowners that get tempted to ‘cash out’ the equity in their home for frivolous spending such as a vacation or other expenditures. Don’t be fooled into thinking that it’s a good way to use your equity.

In some cases, lenders are freezing credit limits or even lowering them as market prices fall in a few markets. Another trend is that as lenders see some borrower’s credit score drop, they’re lowering the amount of available cash on the equity line. That’s assuming of course, that the borrower hasn’t already tapped the full amount of the line.

On a more positive note, for those that have adjustable rates tied to LIBOR or the Fed rates such that their credit lines or their HELOCS adjust similar to consumer debt, they may see the rates go down.

I remember a few years ago when our HELOC rate was dropping rapidly back when Greenspan was dropping the Fed overnight rate to banks and it directly affected our interest on the equity line. Fortunately we don’t have those loans now but for any of you with one of those, some things are working in your favor right now.

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