The home equity loan market has shrunk along with many Americans’ home equity, meaning that arranging a loan secured by the house value has become increasingly difficult and expensive. Here, I will explore the reasons behind this situation.
Falling home values
Home equity is the term used to describe the portion of the home that is actually wielded by the homeowner. So, as an example, if some one wields a $200,000 home and has borrowed no money against it, they would have $200,000 of equity in the home. As another example, some one who possesses a $200,000 home, yet has an outstanding mortgage on the property of $100,000 would have $100,000 in equity. Ordinary mathematics.
Now to a more realistic example – Some one has purchased a $200,000 house, using a $180,000 mortgage, and the home has since fallen in value by 25% to $150,000. They would now be considered to have “negative equity,” in that they owe more money on the house than it is worth. They have no equity in the house and will not be getting a “home equity loan.”
Home values in the USA have fallen to around 2003 levels, meaning any buyer who purchased a home using a mortgage in the last six years is almost certain to have no equity. In fact – at the time of writing this (August 2009), only 5% of American homeowners with a mortgage have positive equity in their home. The other 95% are underwater, and almost 14% have more than -25% equity. None of these people are going to be able to arrange a loan, because they hold no equity.
Enlargened lending criteria
As the banks have continued to suffer mighty losses, and the amount of foreclosures proceeds to increase, they are being compelled to come back to rational lending practices. The 100% home equity loan is a thing of the past, along with the so-called “liar loans,” and 125% Jumbo loans.
This they have enhanced their lending criteria to the point where they will only consider a home loan of 80% of the value of the home. Once the fact that home values have fallen drastically is taken into consideration, this means the home equity loan is a infrequent brute.
In summary, the home equity loan market is unlikely to pick up in the near future, for the ordinary fact that very few have any home equity to borrow against. This does not mean that it is unlikely to arrange a home equity loan, but it is significant to know the value of the home and actually have some equity. This is another issue presently being faced – with falling sales volumes, it is becoming increasingly difficult to accurately value any real estate, and therefore more difficult to accurately assess the level of equity. One thing is for certain; the banks will err on the side of caution when doing so. Homeowner loans are presently only available to borrowers with a “good” credit score and equity to borrow against.