There just may be an even scarier phenomenon approaching us on the financial and real estate horizon: HELOC’s.

Recently HoweStreet.com made several very interesting comments, in response to The New York Times’ enlightening article: Home Equity Loans as Next Round in Credit Crisis.

We at MarylandCommercialTitle.com believe that information is power. We hope you agree. These are just the facts, as they say. Better to be prepared.

The Facts: Americans owe $1.1 trillion (that’s a lot of debt) on home equity loans — and banks are increasingly worried they may not get some of that money back.

The 2008 HELOC Paradigm: When borrowers default on their mortgages, lenders foreclose and sell the homes to recoup their money. But when homes sell for less than the value of their mortgages and home equity loans — a situation known as a short sale — lenders with first liens must be compensated fully before holders of second or third liens get a dime.

The Problem Illustrated: In places like California, Nevada, Arizona and

• Randy and Dawn McLain of Phoenix decided to sell their home after falling behind on their first mortgage from Chase and a home equity line of credit from CitiFinancial last year, after Randy McLain retired because of a back injury. The couple owed $370,000 in total;
• After three months, the couple found a buyer willing to pay about $300,000 for their home;
• CitiFinancial, which was owed $95,500, rejected the offer because it would have paid off the first mortgage in full but would have left it with a mere $1,000, after fees and closing costs, on the credit line.
• Here’s the kicker: If it goes into foreclosure, which is very CitiFinancial wouldn’t get anything.

The Staggering Numbers:

• More than a third of all sub-prime loans made in 2006 had associated second-lien debt, up from 17 percent in 2000, according to Credit Suisse. And many people added second loans after taking out first mortgages, so it is impossible to say for certain how many homeowners have multiple liens on their properties.
• The Times article notes that 5.7 percent of home equity lines of credit were delinquent or in default in December 2007, up from 4.5 percent in 2006, according to Moody’s Economy.com.
• It’s not unreasonable to assume with the recession picking up steam that 10-15% of those $1 trillion in HELOCs and second mortgages will default.
• If all of this is even close to being true, add another $100-$150 billion in write-offs. And that number can easily be low.

Tags: HELOC Problem

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