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Banks Won’t Approve Home Equity Loans
By plrprousers | February 26, 2010
Failed ATMs
Once upon a time, your home’s equity was the equivalent of an ATM machine. You could walk into a bank and apply to borrow money against your home’s equity. Banks had great ads, asking people to borrow against home equity for any reason at all – even for underwater woven baskets. Now it seems that the home equity ATM has switched itself off as though some virus attacked it. 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. Are these loans slowing down or stopping? 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 also happy to take out the loans, because they could live the good life without too much difficulty. Things changed when the real estate market slumped and the recession became evident, as property prices and incomes plummeted, leading to defaults on mortgages. People who borrowed money as a second mortgage started seeing problems with their finances, as they had two payments instead of one. Household incomes started dipping as well, and banks finally decided to pull the plug when unemployment started increasing along with defaults on 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. A lot of people got settlement plans renegotiated by banks, though others weren’t as lucky. People who took out equity loans now have to pay them back, along with the mortgage when their income is decreasing, which makes the future look bleak. What became of the ATM of their homes’ 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. However, in the event of a foreclosure, it is the primary lender who has the first dibs on any proceeds received from the sale of the property. Under those circumstances, it’s natural for lenders to hit the brakes. Where does that leave the consumer?
As of now, it looks like the borrower is left in the lurch. They’ll need to talk to some people, and figure out a suitable plan of action to sort out the mess they brought on themselves. Returning the borrowed money is after all the primary objective, in comparison to losing the home.
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