Strutting away from home equity debt
Lenders trying to collect billions of dollars in home equity loans face major obstacles. The battle rages: Is it right or wrong for borrowers to bail?
This post comes from Marilyn Lewis of MSN Money.
Think back to 2007. Remember all those hot tubs, granite countertops, boats, cars, vacations and master bath additions that you saw your $50,000-a-year-earning neighbors amassing? Maybe you were amassing a little bit of that bling, too.
How did everybody finance it? Home equity loans and lines of credit, of course.
Now, the bills are due, and Americans are walking away from mountains and mountains of that home equity debt.
Reports The New York Times:
The delinquency rate on home equity loans is higher than all other types of consumer loans, including auto loans, boat loans, personal loans and even bank cards like Visa and MasterCard, according to the American Bankers Association.
The trend continues: Combined home equity write-offs were $7.88 billion in the first quarter of 2010. In many cases, people aren't just walking away -- they're strutting. Righteously. Proudly.
Last year, the Times says, banks wrote off $11.1 billion in home equity loans plus $19.9 billion in home equity lines of credit. That's more than what lenders wrote off on primary mortgages in default.
The result is one of the paradoxes of the recession: The more money you borrowed, the less likely you will have to pay up.
Lenders trying to collect those loans face two big obstacles: The value of the homes they're based on has sunk, and the owners are frequently threatening to declare bankruptcy rather than pay up.
- Calculator: How much debt is too much?
"I am not going to be a slave to the bank," Maricopa, Ariz., real estate agent Shawn Schlegel told the Times. He's reportedly defaulting on a $94,873 home equity loan.
"It's not the homeowner's fault that the value of the collateral drops," said Eric Hairston, who defaulted on a $190,000 home equity loan on his three-apartment property in Hoboken, N.J.
It's really the lender's fault, he told the Times.
Since the lender made a bad loan, Mr. Hairston argues, a 10% settlement would be reasonable.
"We felt we were just tossing our money into a hole," reasoned Darin Bolton, a Chicago-area software engineer who defaulted on loans for his home and then moved into a rental a few blocks away.
"I'm kind of banking on there being too many of us for the lenders to pursue," he told the newspaper. "There is strength in numbers."
Outrage -- on all sides
There's a feeling, admittedly crude, that many of us probably share: simple envy of those who are getting away with it.
Blogger Tim Iacono articulates it nicely:
As one who only used a HELOC to buy gold and silver bullion seven or eight years ago and then paid all the money back when things started to really get out of control and we ended up selling our house and renting for a while, I'm a bit envious of some of these people.
(The NYT story is) all thoroughly depressing for anyone who managed to live within their means over the last eight or 10 years and succeeded in not turning their lives upside down by thinking that there really is a free lunch.
Blogger Felix Salmon at Seeking Alpha faults the reporting in the story for being "anecdotal" and not sufficiently "quantitative."
- Calculator: How much home equity do you have?
Calculated Risk quipped, "Oddly, loans that are underwritten to even minimal standards have fewer delinquencies."
Most commentators took one passionate side or the other of the familiar debate: Is it OK or is it not OK to walk away from mortgage debt? The Naked Capitalism blog calls the article "bank friendly borrower bashing":
Let's be clear: There are no doubt more than a few people who bought more house than they could afford who had out-of-control spending habits. But there is a disturbing propensity in the media to find egregious cases and write them up, with the implication that they are representative. In fact, they are a tail end of behavior.
Kay Bell at Don't Mess With Taxes summed up the other side of the debate: "What really gets my blood boiling is the attitude, apparently prevalent across the country, that it is OK to (not meet) your obligations," she wrote, continuing:
There's a lot of political hand-wringing and wailing about "what's happened to the country I knew?"
Well, the country I grew up in was one where people did what they said they would do.
We all love this argument
No matter how often we have this debate, there is appetite for more.
"A slave to the bank!" fumes "Vigilant Grandpa" on his blog:
You take out a $95,000 home equity loan and bought what ...?
Now your silly bank wants to be repaid and you deem this slavery. Are we to believe your banker plucked you from your family, bound you in shackles, transported you via ship and sold you to the highest bidder for a lifetime of hard labor?
Not everyone blames the walk-aways. A sample:
At The Nest's community forums, "BlackMamba" says:
… anyone with half a brain knew we were in the middle of an unprecedented real estate bubble. If you (the banker) are using real estate as collateral for the loans it was your job to know that the collateral was not actually worth the value of the loan. Thus, no tears (for bankers) from me.
At the CNBC forum, reader "DanP1966" said banks brought it on themselves:
Problem with that is that the banks had no real skin in the game either because they were just packaging these things for resale and taking a slice upfront and for servicing the loans.
Amoral behavior on the part of lenders doesn't justify amoral behavior by borrowers, says personal-finance expert Liz Pulliam Weston, summarizing the pros and cons of strategic defaults in an MSN Money article, "Are you foolish to pay your mortgage?" On the contrary, she says, we should hold both sides accountable.
More from MSN Money:
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