Description: Get to know how the recent mortgage industry meltdown affected distressed borrowers looking for home equity loans to consolidate their debts.    

Recent mortgage crisis: Effect on debt consolidation and home equity

Insecurity in the mortgage lending industry changes the attitude towards debt consolidation loans. Homeowners who wish to utilize their home equity for consolidating high-interest debts might just have to hang around till the mortgage industry dilemma calms down.

Home equity and debt consolidation  

When home loans were simpler to qualify for, debt-laden homeowners had the opportunity to use their home equity for consolidating debts. When the equity value was adequate, these people could exchange many high-interest credit accounts with one reasonable home equity loan or cash out mortgage refinance loan.

Unluckily, recent restrictions in the home loan industry are making it more and more difficult for those individuals who want to consolidate. The lenders’ interest to offer cash out refinance loans and home equity loans has gone down significantly to such an extent that borrowers with poor credit are experiencing problems to become approved for loans. Some of them are left with just one option: going for a high-interest unsecured personal loan.

Factors affecting debt consolidation loans

1) Inadequate home value appreciation  

Without home value appreciation, homeowners can’t accumulate equity. When you don’t have equity, you don’t have any borrowing power.

2) Stricter underwriting norms

Lenders are no more as willing to loan against 100% or over of home equity. Practically, most homeowners can only hope to borrow just 80% of the home equity.

3) Decrease in secondary market demand for home loans

Escalating nonpayment rates have immensely panicked secondary market investors and they are avoiding mortgage-backed investments. This has left the industry struggling to modify to a reduced level of liquidity.

4) Drop in interest rates

In October 2009, the Federal Reserve reduced the prime lending rate for the second time in 2 months. Declining interest rates usually encourage borrowing by making it cheaper.

5) Lackluster financial performance of lenders

Once the industry comes out of the dilemma, lenders would have to find a solution to go back to their impressive performance level. This indicates that they would need to return to what they have been doing best; offering mortgage loans but this time, only feasible ones. Though the existing atmosphere of conservatism in underwriting would stay on, it would probably turn around with time once lenders become more contented working under new industry norms.

Provided that these elements are generating some crosswinds in the home loan sector, overextended borrowers might have to select between the lesser of the two iniquities:

Keeping the debt as it is till lenders are ready to provide debt consolidation loans
Reorganizing the debt with a costly personal loan

There is some good news that financial cycles tend to repeat themselves and the mortgage industry would ultimately be steady. It’s just difficult to predict for how much time the after effects of the present dilemma would remain.