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 were also flashy in their advertisements, asking people to borrow on their home equity for any reason under the sun. 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. Have these loans suddenly been stopped? 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. 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 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 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 already borrowed the money they wanted, they found themselves unable to repay these loans when they came due. 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. That said, if foreclosure occurs, it’s the lender who gets the lion’s share of dividends. Under these circumstances, it is natural for the lenders to put the brakes on such loans. Where is the consumer left in this?
As of now, it looks like the borrower is left in the lurch. 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.
