It sounded like the answer to Mike and Robin’s debts: They would borrow against their house and roll their car loan and credit-card bills into one payment.
But they might have been asking for the wrong kind of help. The loan the couple took out in August became a huge liability just a month later when Mike’s civil service job was transferred to Germany.
That’s because the value of the four-bedroom home in Widefield they bought in 1989 is equal to what they owe on their mortgage and home-equity loans. After selling the home, they’ll have no cash left over.
“We wanted to have just one payment instead of several for the car loan and the credit cards,” said Mike, who asked that his last name not be used. “Even if we sell the home for the appraised value, we will have to save up enough money in the next few months to pay the closing costs.”
Mike and Robin aren’t alone. There are early indications that a growing number of homeowners are falling into the same trap.
Precise numbers are not available; no one tallies homeowners caught with home-equity loans that combine with their mortgages to outweigh the value of their homes. But some of the people who are in a position to see the problem early — real estate agents — say a small but disturbing number of homeowners tempted by offers of easy credit are pleading to sell their homes for no financial gain, or even a loss.
Up to 3 percent of El Paso County’s 130,000 homeowners have no equity, or have borrowed more than the value of their homes, said Brian Maecker of Re/Max Properties Inc., who specializes in selling foreclosed homes.
“There aren’t really any good statistics on how much equity people have left,” Maecker said. “But if more than 5 percent of homeowners are overleveraged, then we have a problem, at least based on what we saw happen here in the late 1980s.”
The 1980s foreclosure crisis was a product of too much speculative home construction, which drove down the prices of existing homes. Soon, homeowners who wanted to sell couldn’t because their homes were worth less than the mortgages against them.
Kerry Wanner, managing broker of Keller Williams Realty, spent much of the late 1980s negotiating with lenders on behalf of homeowners.
Wanner would sell the home — usually for less than the value of the mortgage — then offer the lender the proceeds minus his commission to avert a costly and often lengthy foreclosure process.
Wanner believes lenders are laying the foundation for another foreclosure crisis — though smaller than the one in the 1980s — by making home-equity loans that extend the borrower’s debt well beyond the value of the home. He said some lenders will make home-equity loans that — when combined with the original mortgage debt — leave the borrower owing 135 percent of the value of the house.
The risk involved with borrowing more than a house’s worth was smaller while the local real estate market boomed in the mid-1990s, when home prices rose by 1 percent a month. At that rate, a person who owed 125 percent of the value of a home needed as little as two years to get to the point where the value of the home outweighed the amount owed.
But local home-price increases have leveled off during the past year.
Today, Wanner said, “It will be five years before they have equity. If anything happens to their job stability, if they have to move or they get a divorce and want to sell the home, they won’t be able to so without bringing some money to the closing table.”
Maecker and Wanner say a handful of homeowners have approached them about selling homes with loans that exceed the property’s value. Wanner has had to turn most of them away.
“A 125 percent loan just sets up the borrower for foreclosure or bankruptcy,” Wanner said. “And if it goes to foreclosure, the lender can get a deficiency judgment,” which is a court order to pay what the lender cannot recoup by selling the property.
It may be a while before official evidence of a wave of home-equity foreclosures becomes apparent.
Foreclosure filings are rising, but only a handful of the loans lenders are trying to foreclose are home-equity loans, said Gail Whitaker of the El Paso County Public Trustee’s office. The office handles most foreclosures in the county.
And while bankruptcy filings are surging, homeowners overleveraged with home-equity loans aren’t yet showing up in great numbers at U.S. Bankruptcy Court in Denver, said Phil Kleinsmith, a local attorney who specializes in bankruptcy cases.
Some lenders aren’t worried about foreclosure because borrowers have to have a good credit rating to get loans that exceed the value of the borrower’s home, said Patrick Lynch, manager of the Colorado Springs branch of First Community Industrial Bank.
“These loans are meant for borrowers who are going to stay in the home for five or more years,” Lynch said. “The loans also are structured so that they pay down the principal faster than a normal home mortgage, and thus build up equity faster.”
But there’s an additional reason lenders such as First Community don’t worry about lending enough to saddle the borrower with debt that’s greater than the value of a home: There’s a whole market of investors willing to buy up those loans, taking the risk off the hands of First Community and lenders like it. The market for these loans is so strong that many homeowners get several home-equity loan offers in the mail each week.
