Monday, March 2, 2009

Home Equity Troubles Vol. 1

It seems that everyone is getting hurt from the HELOC craze the last few years. Sure it felt like heaven at the time - spending with no limits since your property was increasing by 10 to 20 percent a year. Lenders did not care if you could repay. And it was just accessing your own money anyways. Nothing wrong with being so financially astute.

Lenders did a good job of changing second mortgages to equity lines and it was enough for people to jump on the spending bandwagon. Allow access on a credit card or debit card and people would drain down their equity without even realizing it. Yes, that really is how crazy things became. In this letter to Meg Green titled Equity loan isn't credit from the Miami Herald we can see how out of whack things became. We can also how little people really understood where the money was coming from that they were spending. Lets take a look -

Q: A member of my family has a large unpaid balance on his credit card. When he spoke to someone about credit counseling, he was told that they couldn't help since it was a home equity loan. Can you advise why they won't work with a home equity loan?

Muriel Sanders, Miami

Unfortunately, that ''credit card'' balance was not borrowings from a credit card company. It was most likely a ''debit'' card attached to an equity line. Your relative was spending down his home equity, and that's a travesty. It should have never been so easy to access the accumulated value in one's home. But we know that now.

Most credit counseling services are good at helping the clients assess their situation and prepare a realistic budget. They then work with the credit card companies to consolidate the client's credit card debts and have a payment plan that will actually pay off the cards in a period of time. This is not the case with home mortgages, and that, my dear, is what this home equity ''credit card'' is.

I would contact the institution that holds the first mortgage to see if a refinance could be done. If the home has sufficient value, and your family member is responsible and can qualify, it's possible both the first mortgage and the home equity line can be combined into one larger mortgage with a lower interest rate. The government is offering help for some strapped homeowners. They should take advantage, if they qualify.

In the meantime, please tell him to stop using that card and get going to the mortgage company. If the first mortgage lender won't or can't help, then have him ask for some relief from the home equity holder. Please do not let him succumb to one of these bogus companies that charge a bundle to help refinance and then disappear. They're out there.

We are sure this is not an isolated incident. There were tons of people who received access to their equity by receiving a "credit card" in the mail. We know, we were one of them. However we knew what it was and locked it away. Other people, like the one in the article, did not and thought it was just another credit card. (Remember the bubble days when credit card applications would pile up in the mailbox everyday? We do.)

Pretty scary all the ways were equity could be drained from the property during the bubble.

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