The Fed recently reported that Americans lost over 60% of their home equity between 2007 and 2009. So it's no surprise that millions of homeowners also lost the ability to borrow against the home equity they once had. In the states hardest hit by the foreclosure tsunami, like California, Nevada and Florida, home equity lending has been virtually nonexistent the past couple of years, for a short list of reasons.As declining home values stealthily depleted the home equity against which these loans were being made, leaving many home equity loans and home equity lines of credit (HELOCs) unsecured and their lenders exposed to great risk -- many ended up out of luck if the property against which the money was borrowed ended up in foreclosure.
Even if state law empowers them to go after the borrower, second mortgage and HELOC lenders aren't able to offset their losses at all by selling the property, like the foreclosing lender (and squeezing blood from broke-as-turnip homeowners has been shown to be an expensive and losing battle, in any event).
Also, upside-down homeowners who file bankruptcy are able to request that the court "strip the second" mortgage or HELOC from their list of debts, a request which is routinely granted. All told, home equity lending had gotten so risky in foreclosure-prone states, many lenders simply opted out of that side of the business. In fact, many a homeowner who had a HELOC secured by the equity in their home has received notification that their lender was closing their line of credit down, due to the excessive risk of default.
But now some surprising news: While it may take years for lost equity to be recovered, home equity lending is one housing market casualty that seems to be coming back to life as we speak.
Home equity loans (which are doled out in a single lump sum), and HELOCs (which a homeowner is able to draw on -- or not -- over time, as they need the cash) are currently being originated much more than anytime in the past few years, according to SmartMoney.
SmartMoney reports that the trend is most apparent in the regional banks operating in the northeast, where Citizens' Bank home equity loans were up 35% year-over-year; in the South, where SunTrust Bank reported a 25% uptick over the last six months, compared with the first half of 2010; and in the Midwest, where Associated Bank originated three times the number of equity loans in the last half of 2010 compared to the last half of 2009.
Despite the higher rates, relative to a first mortgage, SmartMoney's AnnaMaria Andriotis says consumers may still save money on a HELOC or equity loan when compared with a cash-out refinance, if their equity lender is willing to waive the loan origination fees and closing costs that quickly add up on a first mortgage (which many are).
If you go the equity loan or line route, though, Andriotis cautions, beware of restrictions that require you to keep the line or loan for a minimum number of years, imposing a fee if you decide to terminate the account early. Good candidates for today's home equity lending options, according to Andriotis, include homeowners who have strong financials when it comes to home equity, credit and income, but simply don't have the ready cash for college tuition, home repairs and upgrades or even some medical bills. When you take today's low interest rates and price pressures on work-hungry contractors into account, you can save a pretty penny if you fund your home improvements with your home equity.
Home Equity Lending Has Returned, but It Will Cost You