Good news for borrowers
Salon notes the WSJ article on smart customer planning for borrowing.
Wall Street Journal’s Robin Sidel explains that home equity credit lenders are stuck in a tough place when homeowners start defaulting.
While banks can foreclose on a first-lien mortgage, lenders often have little recourse when trying to collect a delinquent home-equity loan, especially if another bank holds the primary mortgage. Banks holding home-equity loans generally can only seize the collateral — a house — after the mortgage is paid off.
When another bank holds the mortgage and the mortgage payments are current, the home-equity lender is effectively powerless to collect the debt.
But here’s the best part:
Unfortunately for home-equity lenders, many borrowers understand that pecking order, concluding there are few repercussions if they stop making payments on their home-equity loan. “Lenders are seeing people go delinquent on home equity who by all rights wouldn’t be expected to go delinquent,” said Dan Balkin of Wholesale Access, a Maryland research and consulting firm that specializes in the mortgage industry.
Lesson to would-be homeowners. Keep your mortgage lenders and home equity lenders separate! Lesson to banking industry: maybe all this slicing and dicing of real estate finance into separate bits wasn’t so smart.
(Meta-econo-blogging note. Sometimes, after skimming the Wall Street Journal and The Financial Times, I turn to the econoblogosphere to see what I missed. Sometimes, as was the case this morning, I find that the econobloggers are all highlighting the same story that caught my eye. The Big Picture and Calculated Risk also chime in.)
Update: This is not advice of any kind.