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The End of the Home Equity Line of Credit?

July 25th, 2011 11:44 PM by Ginger Turner

After being involved in mortgages before and after the turn of the century, the thought of Home Equity Lines of Credit (HELOC) going away is hard to believe. A lot of people would agree that there is no way it could happen, HELOCs are necessary for home owners to have access to. However, when one looks at the statistics and the realities of HELOCs in light of the mortgage malaise, the demise of the HELOC isn’t too far fetched.

According to Preston Howard, successful mortgage broker in Pasadena, 40% of all homeowners who have taken out a home equity loan (HELOAN) or HELOC are underwater. A broad majority of all short sales involve a first and a second loan. To carry this point a little further, HELOAN and HELOC lenders are severely taking it on the chin. What motivation do mezzanine lenders have for extending new lines of credit given the severe losses that they are currently incurring with short sales? There have none. Moreover, there are record numbers of foreclosures as well. We all know that unless the 2nd lien holder pays off the 1st lien holder and initiates foreclosure proceedings on the subject property, their interest is completely wiped out at the courthouse steps. If the property has a negative equity position (as so many do), there is no reason to pay off the 1st lien. So once again, the HELOC lender takes a huge loss.

I remember the days when Greenpoint mortgage would provide a stated income HELOC for up to a 90% LTV on a non-owner occupied fourplex. In today’s economy, the idea of such financing sounds insane, but it’s true. Borrowers could get lines of credit on almost any property type: two to four units, apartment complexes, industrial buildings, restaurants, and hotels. Every class of property was on the table and available to be leveraged but raw land. Now, it’s rare to see a HELOC/HELOAN go above 80% on anything but an owner-occupied property at a maximum 80% CLTV! When one considers the serious dialogue on Capitol Hill regarding 20% down payments being the minimum going forward, the only people who will still have access to lines of credit will be those who purchased their properties before 2000.

In the end, it would not surprise me at all if the HELOC industry were curtailed, if not cut off. Lienholders of 2nd mortgages have been burned severely. They haven’t gotten the returns on equity, priority cash flows, cents on the dollar, or the legal protections that would incentivize the various banks, hedge funds, or private lenders into making such a risky investment. So we shall see what the future holds for HELOC/HELOAN. Will it be a buried past or have a resurgent future?

Posted in:General
Posted by Ginger Turner on July 25th, 2011 11:44 PM

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