theirstaxblog.com

Failed ATMs

Once upon a time, your home’s equity was the equivalent of an ATM machine. You could walk into any bank and apply to borrow money against the equity of your home. 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, banks are just more choosy about who they 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. Ads for second mortgages gave people a perceived incentive to borrow more loans like home improvements, education, and buying stuff they don't need. Consumers were also happy to take out the loans, because they could live the good life without too much difficulty. Things changed when the real estate market slumped and the recession became evident, as property prices and incomes plummeted, leading to defaults on mortgages. People who borrowed money as a second mortgage started seeing problems with their finances, as they had two payments instead of one. Household incomes also started dropping, and banks decided to pull the plug when unemployment went up along with the rate of defaulted 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. Many people got a renegotiated settlement plan from their banks, while others were not so 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 happened to the ATM from their home’s equity? It’s completely 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. Yes, they probably paid higher fees to get the money and may also have kept up their part of the bargain. 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 will need to talk to different people, and come up with a suitable action plan to sort out the mess that they have gotten themselves into. Returning the money is the main goal, compared to losing the home.

Tags: ATMs, banks, borrow money, home equity, lenders, Loans, prices