Number of Home Equity Loan Defaults Continue to Rise

[Jun 20, 2008.]

Despite the economic troubles that plague the nation, homeowners across America have at least been able to depend on home equity loans in order to procure money from their property. However, this source is looking to be shutting down soon, and the results could spell another negative effect on the economy.

Several days ago, layered underneath heaping mounds of ugly figures concerning Countrywide Financial Corporation's earnings report, was the alarming news that its $32.4b portfolio of prime home equity lines of credit had already begun to rapidly disappear. As a result, the California-based lender had no choice but a charge of over $700m related to homeowners' unsurprising inability to pay back the equity that they have been extracting from their homes.

Countrywide is recognized as being the country's largest provider of home equity loans, holding at least 9% of all the market. Knowing that their credit is started to disappear, the situations shows premonitions of bad news for the lenders involved. Evaluating the short-term effect, this problem is simply another burden for investors involved in the financial sector, but in regards to the long-term impact, it seems that a large amount of money is going to be taken away from homeowners -- at least, in California. When combined with the rising percentage of unemployment, this problem could present a major conundrum for already struggling homeowners.

Last week, Countrywide already begun to send out letters to over 120k homeowners, informing them that their credit lines for home equity were shut down since the estimated value of their homes had fallen below what the amount of their loans.

An estimation provided by Calculated Risk, a blog specializing in mortgage finance and real estate issues, has gone on the record to state that the mortgage equity withdrawals for the 4th quarter amounted up to at least $145b. If lending standards are tightened further and put into effect for the loans, then it isn't implausible that at least $50b of consumer spending power will be removed from the economy.