March 28, 2008

Home-Equity Loan Debt: $1.1 Trillion

It sounds more like our national debt, doesn’t it? In a way, it is. Americans owe a total of $1.1 trillion — with a T — on home-equity loans, home equity lines of credit and second (and third) mortgages, reports The New York Times. Scary, huh?

What’s even scarier, for lenders, anyway, is that some of that $1.1 trillion might never get paid back.

To get it, many lenders are taking the extraordinary step of preventing some people from selling their homes or refinancing their mortgages unless they pay off all or part of their home equity loans first. In the past, when home prices were not falling, lenders did not resort to these measures. Such tactics are impeding efforts by policy makers to help struggling homeowners get easier terms on their mortgages and stem the rising tide of foreclosures.

When a house is sold, the holder of the primary mortgage must be paid off first. These days, with so many folks upside-down, there’s sometimes little left over to pay the secondary loans. So the holders of the secondary loans are digging in their heels.

Lenders and investors who hold home equity loans are not giving up easily, however. Instead, they are opposing short sales. And some banks holding second liens are also opposing refinancings for first mortgages, a little-used power they have under the law, in an effort to force borrowers to pay down their loans.

Combine this with the fact that sellers don’t want to budge on price, and you can see why housing slumps tend to drag on and on. Once someone blinks and the dam breaks, and the prices of REOs become the comps in the market, we’ll start to see real recovery.

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