Bankruptcy & Foreclosures

In my last post I had mentioned the reality that due to many no-money-down mortgage programs, fewer and fewer borrowers have any available equity in their homes to tap into in case of a rainy day. Believe it or not, compounding the situation is the latest trend in which even mortgage holders with equity in their homes are suddenly being denied.

Lenders are reporting that hundreds of thousands of home-equity lines of credit have been frozen while still others are being forced to significantly lower credit limits. Why the sudden fear from lenders to issue these second mortgages? The answer is all around us: Slipping home values and rising default rates in recent months are doing a great job in reminding lenders that the risk involved in laying out the cash may be far greater than the profit margin on the interest alone.

I’ve already been flooded with questions from readers (and clients alike) wondering what choice this grim situation leaves them to work with. The reality is that homeowners who were ready, willing, and able to tap into their home’s equity through a line of credit are now going to have to consider refinancing their first mortgage (as opposed to taking on a second one).

The good news is that refinance customers just may be the biggest beneficiaries of the recent Federal Reserve’s rate cuts. This is especially pertinent to individuals with Adjustable Rate Mortgages (ARMs) about to endure the rate reset (increase).

Back to the recent home equity crunch, some lenders are actually looking into areas where home values have depreciated significantly and are actually contacting their customers in the region to let them know that their ability to access existing lines of credit is going to dip due to the decline in neighboring property values. While other major lenders are taking a slightly different approach whereby rather than freeze entire regions, they are simply drastically lowering the percentage of the home’s value that can be tapped into (in some cases from 95% on down to 65%).

The bottom line is that the subprime mess is far from behind us yet and while the Federal Reserve is trying to contain the problem with rate cuts, the lenders are finding themselves in quite a dilemma that simply slashing their profits (the interest rates) isn’t going to solve.