Friday, April 3, 2009

HELOC Defaults

Wow! People are not paying their equity loans? Can this be true? Remember when these lines and loans were their money that they knew how to spend and invest like financial experts. Remember when you did not need to make money to pay HELOCs and HELs you just needed an asset (read house) that had the equity built up. Remember when we could take out more than 100% of our equity. And our all-time favorite of using the equity to pay off the mortgage - that was clever.

Now we have to pay that equity back. Now that equity built up during the bubble has vanished and that money, our money, that we borrowed has to be paid back. But since many could never afford the HELs and HELOCs in the good times, they are not paying it back in the bad. This article from Bloomberg titled U.S. Home-Equity Loan Delinquencies Climb to Record shows how bad things are. Let's take a look -

Late payments on home-equity loans rose to a record in 2008’s fourth quarter as job losses and the deepening recession put a strain on borrowers, the American Bankers Association reported.

Delinquencies increased to 3.03 percent of accounts in the period from 2.63 percent in the third quarter, the Washington- based group said today in a statement. A composite index of eight types of consumer loans, including auto and property improvement, rose 11 percent to a record 3.22 percent, the highest since the ABA began collecting the data in October 1974.

“The wheels just fell off the economy in the fourth quarter,” James Chessen, the association’s chief economist, said in the statement. “The amount of job losses dealt the economy a severe shock, and that continues to be the biggest driver for delinquencies.”

Of the eight loans in the closed-end accounts, delinquencies rose on seven: indirect auto loans arranged through third parties such as car dealerships, direct auto loans, property improvements, home equity, marine, recreational vehicle and personal loans, the group said.

Delinquencies on home-equity lines of credit rose to a record 1.46 percent in the fourth quarter from 1.15 percent in the previous period.

And remember these numbers are from the last quarter of 2008. With the huge increases in unemployment they will get even higher. Between lenders closing down equity and returning to stricter lending practices loans will go back to what people can afford to pay back. The days of having a pulse be one of the only requirements for getting a HELOC is long, long gone...

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