In a Realty Times article, the American Bankers Association reports that delinquencies in the home equity loan arena rose 7 percent in the fourth quarter of 2006. And what is a home equity loan? It's basically a second mortgage, and like the first mortgage, it locks in an amount borrowed, an interest rate and a term, but unlike its first mortgage cousin, the interest rate is much higher. In fact, the borrower could pay at full percentage point more interest on a home equity loan versus a first mortgage.
More delinquencies in home equity loans provides even more evidence that not all is well in the mortgage loan business.
Borrowers have used home equity loans to finance their way out of mortgage insurance. This has been called a "piggy back loan" where the borrower uses the home equity loan to come up with a big enough downpayment to qualify for a conventional first mortgage. With the value of homes dropping across the US, problems with paying these kinds of home equity loans could result in foreclosures that don't provide enough funds to pay off both the first mortgage and the additional loan. (First mortgages would always be paid off first if a home is sold.) With a remaining debt to pay and no asset, bankruptcy starts to look really good for the borrower.
Borrower bankruptcy isn't the only bankruptcy occurring as loans go delinquent; lenders are also going bankrupt. The latest casualty is New Century, one of the big players in the subprime lending market.
The Implode-O-Meter is now up to 48.
Michael Chantrel
