What - No More HELOCs?

Interesting article from the Wall Street Journal about the Souring of HELOCs.

Here comes another headache for banks suffering from the mortgage downturn: Losses on home-equity loans are soaring, even at some lenders that avoided big blunders on subprime loans.

When times were good, banks raked in billions of dollars in profit from home-equity loans, which allow borrowers to tap the accumulated value in their property with either a loan for a specific amount or a line of credit. As long as home prices were rising, lenders had little to worry about.

But falling home values are leaving banks with little or nothing to collect on many home-equity loans in case of default. Some stretched borrowers are keeping up with their mortgage and credit cards — but not their home-equity loan.
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Meanwhile, financial institutions are refusing to provide home-equity loans to homeowners whose residences are already weighed down by big mortgages in states like California and Florida where home values are falling fast.

“This product was meant to help people do construction on their house, [and] do debt consolidation — not to take out every last dollar of equity in their home to finance a different kind of lifestyle,” Mr. Scharf said. J.P. Morgan is “rolling our changes back to represent that kind of product.”

Maybe Mr. Sharf should have made that declaration years ago before things got so out of hand. Also one of the reasons HELOCs interest payments are tax deductible is to fix up your house - not to live an affluent lifestyle, not to drive a Hummer, not to take exotic vacations, to to pay for plasma TV, and on and on and on...

And unlike first liens - HELOCs are harder to recoup.

"While banks can foreclose on a first-lien mortgage, lenders often have little recourse when trying to collect a delinquent home-equity loan, especially if another bank holds the primary mortgage. Banks holding home-equity loans generally can only seize the collateral -- a house -- after the mortgage is paid off.

When another bank holds the mortgage and the mortgage payments are current, the home-equity lender is effectively powerless to collect the debt.

Unfortunately for home-equity lenders, many borrowers understand that pecking order, concluding there are few repercussions if they stop making payments on their home-equity loan.

It is impressive how circumventing financial payments has become a very quickly picked up skill. So many people who could not understand the complexities of teaser rates and negative amortization now know how to live in a house for over a year and not pay their mortgage - and which bills to pay and which ones to not bother with.