California Home Equity Loans
A study last year showed California home equity loans and other forms of loan modification programs in California were the major cause of homes being lost to foreclosure. This finding was surprising because it had been previously assumed that the home loss statistic was attributable to California mortgage loans being taken out when homes were at near-peak prices prior to the real estate crash. The California legislature is currently working on regulations that would make it easier for homeowners to get out of their underwater mortgages, including second mortgages.
This kind of legislation counters the intent of a measure that is making its way through the national House of Representatives at present as an attachment to a bill regarding how the FHA manages its loan business. There is growing concern in Washington that more and more underwater homeowners will simply quit paying on their mortgage loans that are for more than the property is worth, regardless of their actual ability to make the payments.
The measure would modify the bill to make homeowners who voluntarily walk away from their mortgage obligations ineligible for FHA loans. The idea is to make sure people who choose to default for personal gain do not benefit from a government subsidized loan program to buy another house now that prices are so much lower.
What the California legislature is trying to do is to get more protection for homeowners who go through a foreclosure. Currently, banks can’t make claims on the borrowers other assets to try to get their money back on a foreclosed property. The new rule under consideration would include second mortgages, such as California home equity loans, so it would be more difficult for lenders to recover those as well, with the exception of cash-out refinancing.
If the study indicating that California home equity loans and other refinance vehicles were the major cause of borrowers finding themselves underwater holds true for other states, it provides a real conundrum. If over-borrowing on second mortgages is what has caused so many people to be underwater across the nation, then even where prices did not crash as badly as they did for those with a California home loan, many more borrowers will be underwater and may also be inclined to let the house go, rather than to continue to pay more than it is worth, which will lead to further losses for banks.
Naturally, both legislative bodies have economic stability in mind. Which approach will have the best effect remains to be seen.
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