Borrowers Face Equity Roadblock

[Retire Soon]

The effects of sinking home values are having a negative impact on homeowners who wish to take equity in their homes. Many lenders across the U.S. are now requiring that homeowners maintain a larger percentage of home equity as a precautionary measure against financial problems. Some lenders have even gone so far as to tell their customers that they can no longer take any more money out on their line if credit. Countrywide Financial, for example, sent out 122,000 letters last week telling homeowners with equity lines of credit that they could no longer take any more money from their credit line. In many cases, according to Countrywide, many of these second trust deeds in combination with the first now make the loan upside down, with the borrowers now owing more than the home is worth.

Chase Home Loans, in the face of mounting deliquencies has completely revamped their loan underwriting requirements and beginning Monday will only allow California homeowners to borrow up to 85% of home equity, down from 90%. Additionally, in six California counties Chase will not allow a home equity loan exceed 70% of home value. They will also cap the entire state of Florida at 70% and Nevada at 65%. By the way, the new loan to value percentages will be even lower for borrowers with low FICO scores.

Not only are falling home prices effecting second trust deeds, they are having a negative impact on first trust deeds as well with Fanne Mae
warning lenders that it will require a lower loan to value ratio on loans it buys from them in areas that have experienced significant price declines.


The legendary economist, John Kenneth Galbraith had this say in the introduction of his 1997 edition of The Great Crash 1929, "If we now have a downturn-what is called a day of reckoning some things can, indeed, be foreseen. By some estimates a quarter of all Americans are directly or indirectly in the stock market. Were their a bad slump it would limit their expenditures, especially of durable goods, and put pressure on their very large credit card debt. The result would be a generally adverse effect on the economy. This would not be as painful as the aftereffects of 1929..."

As we all know, these words were written many years before the dot-com bubble burst. We also know that the housing bubble bailed us out from the that speculative bubble shortly thereafter. If John Kenneth Galbraith were alive today, what statement would he make about the alarming way in which consumers are now maxed out not only on credit card debt, but home equity debt as well, with lenders currently having to cut life support from both? What bubble will rescue us from the easy credit/housing bubble as housing did with the burst of the dot-com bubble?


Folks, the easy credit party is quickly coming to an end and we will finally face a "day of reckoning!"

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[old woman]

The people using the house as a piggy bank are going to hurt. I owe about half what my house is worth but more than I paid for it. My nephew owes more than he paid for his but if he rolled in his other debt he would be upside down. He has subprime credit ARM mortgage and very high other debt. He may need to quit spending when is mortgage goes over 10% next summer and he can't refinance because he doesn't have enough equity and too much other debt.

[growing_older]

All this news coverage about foreclosures has got my 11 year old daughter asking if that can ever happen to us. Talk about prime moment for the LBYM lecture. Nailed it.

[HFWR]

Owe $91k on mortgage; house is allegedly worth around $140k. No other debt.

[GLM]

Quote:

Originally Posted by growing_older All this news coverage about foreclosures has got my 11 year old daughter asking if that can ever happen to us. Talk about prime moment for the LBYM lecture. Nailed it.

Good going Growing Older ! Teaching moments are priceless .

As are "I told you so moments."

Just got a phone call From my newly minted Chemical and Biomolecular Engineer. In college she worked for the school very part time on campus and was exempt from all taxes - including Social security .

While she was interviewing - I kept warning her to think of her after tax pay . She did not like the budget I outlined for her but listened fairly well . (OK she committed to a couple hundred higher each month - I was pushing for a bit over 20% savings )

Two weeks into her new job she just received her first paycheck including funds for relocation & signing . Quote - (her) "The government is stealing my money ! " (Me) "Join the crowd "

To be fair It seems they took GA taxes out. (7%) She moved to Tx (for work) before the job started In Jan. (TX has no income tax ) So now she gets to learn how to dal with payroll issues.

Which brings up a pet peve of mine - why does it seem nothing ever done correctly the first time ?

[Arc]

How do interest rates not go up eventually - in this environment? I mean as credit becomes more difficult - won't the banks want more money for extending it? And how else do they make up for the losses on bad loans? Seems inevitable to me - despite government's attempt to stop / delay it.

[brewer12345]

Quote:

Originally Posted by Arc How do interest rates not go up eventually - in this environment? I mean as credit becomes more difficult - won't the banks want more money for extending it? And how else do they make up for the losses on bad loans? Seems inevitable to me - despite government's attempt to stop / delay it.

Umm, the banks effectively have a ceiling on rates they can charge for prime borrowers because of Fannie and Freddie. Everything else is priced off that.

They make up for losses on bad loans by borrowing (deposits) at 3%, lending at 5.5%, and going home at 4PM. Just like always.

[earlyguy07]

""When you are self-employed, that's the money you count on to bridge the gap during tough times. And this is a particularly tough time in both the building and housing industries," Georgiades said."


I thought savings helped bridge the gap through tough times? Too bad.

[FIREdreamer]

I think it is plain mathematics. Just a few years ago, many people felt secure and they spent their entire paycheck (1) + put some on credit cards (2) + put some on a home equity line of credit (3), hence a negative savings rate. Take away (2) and (3), and people will have to reduce their spending as they are left with only (1) to spend. Scare people into saving money and you won't even have (1) left. So I don't want people to start saving money right now because it would have a seriously negative impact on the economy. What can rescue us?

1) Lower taxes, though at this point it seems a politically sensitive subject.
2) Higher incomes. Perhaps all those corporations that have been hoarding profits for the past 5 years can loosen up their purse and give their employees some much needed pay raises. Corporate profits have gone up double digits per year on average, but salaries have barely kept up with inflation during that time. But I think it is unlikely that corporations see it this way, especially at a time when unemployment is rising. They are more likely to lower compensations and show the door to those who don't like it.
3) Keep interest rates fairly low so that people can reduce the portion of their income going to debt repayment and they can spend the difference. But even that is not a silver bullet, as the Japanese could attest. Plus we already tried that and that's exactly what got us in trouble in the first place.
4) Create new jobs.

I can't think of any miracle bubble which could save us at this point.

[FinanceDude]

I think anyone with a FICO over 750 can get whatever they want, 100% financed or whatever..........

[Buku]

Quote:

Originally Posted by FinanceDude I think anyone with a FICO over 750 can get whatever they want, 100% financed or whatever..........

I approached USAA about a $20k home equity loan to complete the finishing of my basement. Instead of financing on my creditcards, ill do a tax deductable HE loan. I have been doing one thing at a time (Like plumbing, or electrical) then saving a little and doing some more etc. Decided to juts finish it off because I am tired of fooling with it.

Some background:
I put down 120k on a 570k purchase in 2005.
My credit score they used for risk assesment was a 758. (I never have problems).
Home equity loan…declined due to insfufficient equity in my house.
I called USAA and demanded to speak to a manager and talked about my 20 year relationship with them, my never having been late on a single mortgage payment in the 5 houses I have bought through them over the years. Yada yada.
Nothing.
My house is listed in a declining market and the appraisal they did was 520K. (Still giving me 70k in equity)….

They wouldn’t give me the loan. things are different now.

[Achiever51]

Quote:

Originally Posted by Buku I approached USAA about a $20k home equity loan to complete the finishing of my basement. Instead of financing on my creditcards, ill do a tax deductable HE loan. I have been doing one thing at a time (Like plumbing, or electrical) then saving a little and doing some more etc. Decided to juts finish it off because I am tired of fooling with it. Some background: I put down 120k on a 570k purchase in 2005. My credit score they used for risk assesment was a 758. (I never have problems). Home equity loan…declined due to insfufficient equity in my house. I called USAA and demanded to speak to a manager and talked about my 20 year relationship with them, my never having been late on a single mortgage payment in the 5 houses I have bought through them over the years. Yada yada. Nothing. My house is listed in a declining market and the appraisal they did was 520K. (Still giving me 70k in equity)…. They wouldn’t give me the loan. things are different now.

Wow.
This paints a different side of the realities of the changing economy. I can understand putting the screws on someone with a shaky credit report, but I would have thought that you would be a sure bet.

Wow.

[Buku]

Quote:

Originally Posted by Achiever51 Wow. This paints a different side of the realities of the changing economy. I can understand putting the screws on someone with a shaky credit report, but I would have thought that you would be a sure bet. Wow.

I called USAA and was astounded, i even got a call back from some muckety muck....they have draconian standards they have to adhere to apparently...no leeway.

[brewer12345]

Quote:

Originally Posted by Buku I called USAA and was astounded, i even got a call back from some muckety muck....they have draconian standards they have to adhere to apparently...no leeway.

Try another bank. Lots of lenders out there...

[myself]

Quote:

Originally Posted by Achiever51 Wow. This paints a different side of the realities of the changing economy. I can understand putting the screws on someone with a shaky credit report, but I would have thought that you would be a sure bet. Wow.

I wonder what the person's debt/income ratio was.

We're in the process of refinancing (to join our primary & secondary into one). 15 year @ 4.625%. My credit score is in the mid 650s, and wife's is in the mid 700s. Mine is so low because of an investment property we are working on to rehab/resell. There was no problem with them giving us the loan. Our debt/income ratio is around 54% (but that includes the investment property that is 100% financed).

[macdaddy]

What's your income? I have just done a few loans through USAA at 90% LTV no problems, but with documented high income.

Quote:

Originally Posted by Buku I approached USAA about a $20k home equity loan to complete the finishing of my basement. Instead of financing on my creditcards, ill do a tax deductable HE loan. I have been doing one thing at a time (Like plumbing, or electrical) then saving a little and doing some more etc. Decided to juts finish it off because I am tired of fooling with it. Some background: I put down 120k on a 570k purchase in 2005. My credit score they used for risk assesment was a 758. (I never have problems). Home equity loan…declined due to insfufficient equity in my house. I called USAA and demanded to speak to a manager and talked about my 20 year relationship with them, my never having been late on a single mortgage payment in the 5 houses I have bought through them over the years. Yada yada. Nothing. My house is listed in a declining market and the appraisal they did was 520K. (Still giving me 70k in equity)…. They wouldn’t give me the loan. things are different now.

[myself]

Quote:

Originally Posted by Buku I approached USAA about a $20k home equity loan to complete the finishing of my basement. Instead of financing on my creditcards, ill do a tax deductable HE loan. I have been doing one thing at a time (Like plumbing, or electrical) then saving a little and doing some more etc. Decided to juts finish it off because I am tired of fooling with it. Some background: I put down 120k on a 570k purchase in 2005. My credit score they used for risk assesment was a 758. (I never have problems). Home equity loan…declined due to insfufficient equity in my house. I called USAA and demanded to speak to a manager and talked about my 20 year relationship with them, my never having been late on a single mortgage payment in the 5 houses I have bought through them over the years. Yada yada. Nothing. My house is listed in a declining market and the appraisal they did was 520K. (Still giving me 70k in equity)…. They wouldn’t give me the loan. things are different now.

Curious question. What's your Debt/Income ratio?

And also if you think about it, they're covering themselves from more possible losses. After all, the house lost 8.7% in 2 years. What if it looses 8.7% in another 2 years? Then, your LTV is around about 95%. That's pretty risky I would say.

[newguy88]

Quote:

Originally Posted by Buku I approached USAA about a $20k home equity loan to complete the finishing of my basement. Instead of financing on my creditcards, ill do a tax deductable HE loan. I have been doing one thing at a time (Like plumbing, or electrical) then saving a little and doing some more etc. Decided to juts finish it off because I am tired of fooling with it. Some background: I put down 120k on a 570k purchase in 2005. My credit score they used for risk assesment was a 758. (I never have problems). Home equity loan…declined due to insfufficient equity in my house. I called USAA and demanded to speak to a manager and talked about my 20 year relationship with them, my never having been late on a single mortgage payment in the 5 houses I have bought through them over the years. Yada yada. Nothing. My house is listed in a declining market and the appraisal they did was 520K. (Still giving me 70k in equity)…. They wouldn’t give me the loan. things are different now.

The people who bought my old house in NJ in the spring of 06 for 520K now have it on the market for 420K and no bites, nothing. Another house in the neighborhood sold for 385K last month! The same HOUSE! A toll Brothers model with the exact same things built on the same street the same year in a good area in NJ. The bank is saying no to you because the apprased value of 520 COULD BE 100K TOO high!!

[Achiever51]

Sounds like the financial institutions are trying to close the barn door now that the horses have run away! Do you think that this over-compensation will have a negative effect on the recovery, if the "good" borrowers are shut out of the market?

[Retire Soon]

Quote:

Originally Posted by Achiever51 Sounds like the financial institutions are trying to close the barn door now that the horses have run away! Do you think that this over-compensation will have a negative effect on the recovery, if the "good" borrowers are shut out of the market?

IMHO, I think the excessive risk taken on my financial institutions over the past decade or so will hurt everyone, even the "good" borrowers like us.