Home equity loans in peril

With default rates for home equity loans on the rise, lenders such as Countrywide and Chase have already limited the percentages that borrowers can access. Of course this could have important ramifications for homeowners grown accustomed to using their home equity lines not only in terms of emergency, but to pay for lifestyles not covered completely by their paychecks. From the Fortune magazine story:

Last week, buried deep in the ugly details of Countrywide Financial Corp.'s (CFC, Fortune 500) earnings release, was the news that its $32.4 billion portfolio of prime HELOCs - home equity lines of credit - had begun to rapidly deteriorate. The reeling Calabasas, Ca.-lender was forced to take a $704 million charge related to homeowners' inability to pay back equity they extracted from their homes.

The structure of these loans appears to spell trouble for Countrywide and other home lenders with big home equity loan books. According to an overlooked Moody's Investors Services note that came out last Wednesday, once a certain threshold of losses is achieved in a home equity loan securitization pool, the bond holder is paid off ahead of the lender...

In the short-term, this is just another blow for a investors in the financial sector. Longer-term however, it looks like a lot of ready cash is getting taken away from homeowners, at least in California. Coupled with rising unemployment, this could pose a major headache for already strapped homeowners...

The Calculated Risk blog, which specializes in real estate and mortgage finance issues, has estimated that mortgage equity withdrawals for the fourth quarter totaled $145 billion. If tightening lending standards are put rapidly into place for home equity loans, it is not inconceivable that $50 billion or more of spending power is instantly removed from the economy.In other words, at least one-third of the recently passed $150 billion stimulus package is already canceled out.