Letters to the Editor
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Amazing...
...to see the typical supply-siders direct the blame almost entirely towards the demand side of the problem.
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What have homeowners learned?
It seems to me that once you stop making your home equity loan payment, you're at best a renter headed to Bankruptcy. The home equity loan doesn't go away just because they cannot forclose right now. If in the future your house goes up in value enough to cover all loans, they can foreclose and buy out the first. Also, there will be no refinancing or sale without the 2nd being paid in full with all penalties, interest and collection costs. And if some day the first mortgage holder does foreclose, the home equity loan probably will survive the foreclosure and come after the now defunct home owner.
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What they have learned
I'm not sure it is as bad as all that--as bankruptcy judges can cram down mortgages on second homes and investment property can they do it on home equity loans?
I think it is fairly obvious that people aren't going into default on their home equity loans for trivial reasons. I'd think it is most likely to stay current on their primary mortgage. So this may be a completely rational choice when faced with a set of fairly bad options.
The industry let people get in over their heads due to huge amounts of liquidity sloshing around the system. It was obvious to anyone with half a brain that the amount of liquidity in the system wouldn't last forever. So if lenders get burnt, it's primarily their own fault.
And if borrowers have to make tough choices, they should also need to bear some responsibility for leveraging up. Bankruptcy is tough, but it isn't the end of the world in this country. Admittedly it is tougher now that the credit card companies got their hands on the law, but we don't live in a world of debtor's prisons anymore.
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Be careful, this varies from state to state
In Illinois and possibly other states, if a lender who is in second position, such as a bank which has extended a home equity line of credit, files a foreclosure case, the owner can eventually be evicted once the foreclosure process is over. This rarely happens because the first mortgage lender still has priority, but it could happen if the balance owed on the first mortgage is low.
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After some admittedly brief research
It looks like the cramdown point is mixed, but could be very good for the homeowner in at least one case. Apparently in NY (where I live) if the first mortgage is higher than the value of the house (i.e. there's no equity for the home equity line to attach to) the claim to the home is GONE in bankruptcy. The 2nd mortgage/home equity loan goes into the pool of unsecured debt. So the choice to not pay in that case is pretty clear cut.
Just another lesson in what can happen to lenders and borrowers if they assume that the only way the value of collateral can go is up (and at a high rate).
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@micberson
Thank you; I was feeling like a sucker for paying down my home equity line on schedule.
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When banks compete, you win!
This time, the competition is just a little more direct.