Equity Home Loans

Home-Equity Loans - losses?

If banks give out a loan based on the value of the property, and the value declines, how are the banks taking losses? The money has already been lent no matter what the value of the house is, so why are people defaulting on home-equity loans?

Public Comments

1. The bank only takes a loss if the borrower fails to repay. In that case, the house is the collateral. As to WHY people default, that is another subject.
2. If the value of the house declines, it is more detrimental to the borrower than the bank. Banks only take losses if someone defaults on the loan. People will default on the loan for various reasons: Loss of job Monthly Payments went up Bank calls the loan due (which they are entitled to do...read the mortgage docs) Have emergencies that wipe out savings etc.
3. They only really take a loss if the customer defaults on the loan. The home equity loan is a 2nd mortgage. If the customer defaults on the 1st mortgage and it is foreclosed, the house would not sell for enough to payoff both loans. The bank that holds the 2nd lien, would not get paid.
4. A home equity loan is generally a 2nd, although in some states like TX any cash out loan is Home Equity. As long as the borrower keeps paying, no problem. HELOAN rates are usually fixed. HELOC (credit line) are variable. The subprime market is where most of the defaults are. Those are people who had bad credit to start, and then bad lenders and stupid people got together for loans that were doomed from the start. The bank where I work isn't in the subprime market, but I did try to talk people out of ARMs when the fixed was just a dab higher, and Interest Only loans (there's a specific customer for this loan, but it's not the average Joe), and all they could see was the small starting payment. Nobody wanted to think about what happens in 5 years. As a lender, I can't say, "I'm not giving you that loan because it's bad for you." If they qualify, I have to let them have it. There are certainly bad lenders out there, but there are also stupid people who don't know what they're signing.