Failed ATMs
Once upon a time, your home’s equity was the equivalent of an ATM machine. You could walk into a bank and apply to borrow money against your home’s equity. Banks had great ads, asking people to borrow against home equity for any reason at all – even for underwater woven baskets. It seems the home equity ATM has shut itself off. The loans to buy the flashy cars, TVs and home improvements are no longer available, and many people cannot just borrow for any purpose anymore. Are these loans slowing down or stopping? No – it’s that banks are choosier about who the lend to.
Reason to Hold Back
At the height of the real estate bubble, banks were flush with funds and wanted to entice people into taking out further loans on the equity they held against their homes. Flashy advertisements offering second mortgages to people gave a number of reasons why more loans should be taken out, including home improvements, education, and purchase of luxury goods to make their point. Consumers were happy to take the loans, because they could have the good life without struggle. Everything changed when the real estate market dropped off and the recession set in, as property values and incomes dropped, which meant more defaults. People who had borrowed money as a second mortgage began seeing many difficulties with their finances, as they now had to deal with two payments instead of one. Household incomes started dipping as well, and banks finally decided to pull the plug when unemployment started increasing along with defaults on mortgages.
No More ATMs
With falling prices of properties, people found that the value of their homes had declined as well. While they had gotten the funds they wanted, they found out they weren’t able to pay the loans back when the check came. A lot of people got settlement plans renegotiated by banks, though others weren’t as lucky. The people who took out home equity loans are now having to pay back two loans in a time when their incomes have decreased, making their future outlook bleak and discouraging. What became of the ATM of their homes’ equity? It’s gone, along with their futures.
High Risks to Lenders
People who borrowed money on their home equity do not realize that these lenders are at risk of losing their entire investment in the case of a foreclosure. They might have paid higher fees to get the money, and might have kept up as well. However, in the event of a foreclosure, it is the primary lender who has the first dibs on any proceeds received from the sale of the property. Under these circumstances, it is natural for the lenders to put the brakes on such loans. Where does that leave the consumer?
As things stand at the moment, it certainly looks like the borrower is left in a difficult cash crunch. They’ll need to talk to some people, and figure out a suitable plan of action to sort out the mess they brought on themselves. Returning the borrowed money is after all the primary objective, in comparison to losing the home.
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