Credit Squeeze
You can not open a newspaper without hearing the term credit crunch and falling home prices. The financial mess is going full circle, first from main street down to wall street and now back to main street…
The worst time to borrow money is when you really need it desperately, and as many American home owners are finding out, even if they had planned for tough times, lenders are now pulling in their options. This past week Wachovia made headlines for freezing open lines of credit on home equity loans. Large lenders such as Indymac and Countrywide began doing this earlier in the year. The default rates on second mortgages have spiked to such high levels that most lenders are no longer offering second lien products. This puts homeowners in a difficult spot, already banks are being flooded with calls from customers who are trying to pull out all of the equity they can from the home equity lines in fear that the lender could freeze them out.
Complicating matters is most mortgage lenders have now also reduced the amount of equity a home owner is eligible to reifnance. In years past it was not uncommon for home owners to refinance at 95 to 100% of their homes value. Those options are long gone, most lenders now cap the loan amount at 90% of the homes value and even lower if your zip code is categorized as being in a “declining market”. The only option a home owner has to cash out refinance above 90% is through an FHA backed mortgage.
Many economists are predicting the limited access to home equity will result in a dramatic rise in the default of consumer credit cards. Homeowners who have historically used their homes equity to pay off their revolving debt have run out of options and will be stuck to make difficult financial decisions if the market does not improve in the near future.