When home values rose, so did the popularity of the home equity mortgage. Many homeowners used these loans to tap into fast cash, as houses became the new ATM machines. Today, the same easy path to money is a major obstacle to refinancing away from painful mortgage loans.
Loan modifications and foreclosure bailout plans sound encouraging to those overwhelmed by high-priced mortgages and deteriorating home values. The confluence of negative housing market forces has managed to totally eradicate the home equity in many people's properties, and now they're yearning for a chance to refinance into an affordable monthly payment to save their properties.
But the truth of the matter is that even with government intervention and taxpayer funds to reduce the burden on the housing industry through loan modifications, millions of Americans cannot and will not be saved. Some don't have enough home equity to make it worthwhile. Others are saddled with home equity loans that are a huge impediment to anyone wanting to negotiate out of a bad loan through a refinance.
Home equity loan quagmire
Investors who hold second mortgages or home equity loans are typically opposed to letting a homeowner refinance a first mortgage unless they-the holders of second mortgage liens-are guaranteed a payoff. Meanwhile, those who offer refinancing of first mortgages generally disqualify any applicants who still owe balances on home equity loans. These two kinds of lenders have diametrically opposed competing interests, and when a first mortgage is refinanced, it usually wipes out the investment of those who made the subsequent second or third mortgage loans. Homeowners are stuck in the middle, like a person with one foot on the dock and one foot in the boat as the boat sails away.
Drowning in debt
The fundamental problem is that today's homeowners are often drowning in debt that no longer has any tangible relationship with their home values. In a rising market, their debt was covered by rapid equity growth; but in today's market, all of their loans are overexposed with too little collateral. When all is said and done, many are indebted for property purchases that no longer represent any worthwhile collateral compared to the money owed. Banks and investors have no incentive to refinance or rework loans that homeowners still won't be able to repay. That problem is compounded by the adverse impact of substantial negative equity.
When the market was booming, homeowners often relied on refinancing to consolidate all their mortgages and home equity loans into a brand new single mortgage. As interest rates fell and home equity rose, it was easy to do this without increasing one's monthly payment. Times have changed, however, and as home values continue to sink, so do the hopes of those who are now severely upside down in their mortgages and craving loan modifications. Nobody wants to lend to them-and those who did in the past see no alternative but foreclosure to resolve defaults.
