Although the real estate market began its collapse several years ago, banks and lenders continue to sort out the related issues today. According to the New York Times, during the real estate boom years banks nationwide lent homeowners more than approximately a trillion dollars in the form of home equity loans. These loans were secured solely by the value of homes, which once seemed to increase without bound.
As home values rapidly declined, though, so did the ability and willingness of these homeowners to repay their home equity loans. The American Bankers Association reports that the delinquency rates on home equity loans are higher than those of all other consumer loans, including credit cards and car loans.
Lenders want to blame the borrowers for taking on debts beyond their means. Borrowers insist that lenders are also to blame, as they extended credit to individuals and businesses well in excess of reason, even using predatory lending practices at times. Whereas home equity lines of credit were once only available to those with the strongest credit history, lenders pushed to expand the availability of these loans under the assumption that the growing real estate market would support the risk.
Arguably, there is plenty of blame to go around. Almost everyone involved in the real estate market trusted that the housing market would continue to expand, with little concern that the values might eventually decline. Now that the market has collapsed, however, lenders and borrowers are left arguing over who will be held accountable. More important than the question of who will accept the blame is the question of who will accept the consequences.
Thus far, it seems that the consequences will be shared. Lenders are writing off their losses at unprecedented rates — the New York Times reports that in the first quarter of this year, lenders wrote off $7.88 billion in home equity loans and home equity lines of credit. However, borrowers are also not getting off consequence-free. Borrowers who default on home-equity loans will notice the effects in their credit ratings for a long time to come. These defaults may also have debt relief tax consequences.
It is important to note, though, that this is not the end of the crisis for the California housing market. Unfortunately, the worst is yet to come. A new wave of foreclosures will arrive in the near future, as option adjustable-rate mortgages (ARMs) reset and borrowers find their monthly payments drastically increasing.
According to Business Week, when option ARMs reset, the monthly mortgage payment typically increases 65 percent or more. As many homeowners are already struggling to meet monthly mortgage payments, a rise of this magnitude will likely force many to enter foreclosure.
For those facing foreclosure or struggling to meet monthly mortgage payments, there may be options. Speak with a knowledgeable attorney to discuss your circumstances and to Save Your House from foreclosure.