Friday, July 25, 2008

What do you need in order to take a HELOC?

You need equity. Among a list of other things. But no equity means no equity line.

With property values deteriorating, equity is evaporating. That equity you had two years ago is probably not all there anymore. No or little equity means no chance of getting a HELOC.

Another big change is that during the Great Housing Bubble lenders were allowing access of up to 110% of a properties equity to be withdrawn.

But that was then and this is now. Now lenders are only allowing mortgage equity withdrawal to be 80-90% of a property value. In some areas with house values falling substantially the values may be even stricter. These are some of the reason that this article from Reuters regarding home equity cash-outs fade as prices slide is not that surprising. Lets take a look -

The share of homeowners who tapped home equity for extra spending money when refinancing fell in the first half of 2008 to the lowest level in several years, mortgage financier Freddie Mac said on Thursday.

The dollar amount of money borrowed also sank in the first six months, to the lowest in four years.

Maybe because there is no money/equity left. And those that can borrow must have significant equity with a good credit score.

"Declining home values across much of the nation have curtailed the amount of home equity available to be cashed out by homeowners," Frank Nothaft, chief economist at the second largest U.S. home funding company, said in a release.

Home prices through April fell about 18 percent from their July 2006 peak, according to the 20-city Standard & Poor's/Case-Shiller index.

That is an average of 18% equity cut from all houses across the board. That is alot of money gone.
In the second quarter, about $38 billion in home equity was taken by homeowners when they refinanced conventional loans made to prime borrowers, Freddie Mac said. That was less than half of the $79 billion cashed out in the same period last year.
Other parts of the equation are people were getting equity based on their asset not the ability to pay. These practices have stopped. Compound that with the fact that there is just less equity, and this report comes as no real surprise. It is not good news by any means but it really is no surprise.

It may even be a silver lining - people less in debt so less chance of being underwater and all that follows.

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