Home equity loan defaults soar
If you are a homeowner and want some money from your home, then you may be disappointed, because the last resource of cash for you as a homeowner is shutting down.According to the Countrywide Financial Corp.’s recent report, $32.4 billion portfolio of prime HELOCs - home equity lines of credit is depleting fast.
The lenders with big home equity loans are in danger because of the defaults in home equity loans. Countrywide and such other big players may land in trouble soon as their portfolios of home equity loan are bigger. In case the loss in a home equity loan securitization pool reaches a threshold, the lender gets the money only after paying the bond holder.
The exposure of a large lender to home equity loans may not be ascertained easily. This risk is known as rapid amortization and it is carried off balance sheet because it is considered as contingent liability. When deterioration of such loans occurs, then only the balance sheet shows it.
This can cause both short term and long term problems for the homeowners as well as for the economy. This is a big blow for the homeowners and investors for the short term. For long term, lack of ready cash for the homeowners and rising unemployment will hamper the economy.
Last week, the largest home equity lender, Countrywide sent out letters to 122,000 homeowners informing them about the shutting down of their home equity credit lines. Chase Home Lending has reduced the credit line access limit to 70% of the value of the house instead previous 90%.
