10 Cents on the Dollar: How to pay off your home equity line of credit

NY Times columnist David Streitfeld’s article entitled, “Debts Rise, and Go Unpaid, as Bust Erodes Home Equity”, published in The New York Times on August 12, 2010, asserts that most investors expect less than 10 cents on the dollar for defaulted home equity lines of credit such as second mortgages.

“Lenders wrote off as uncollectible $11.1 billion in home equity loans and $19.9 billion in home equity lines of credit in 2009, more than they wrote of on primary mortgages, government data shows. So far this year, the trend is the same, with combined write-offs of $7.88 billion in the first quarter. Even when a lender forces a borrower to settle through legal action, it can rarely extract more than 10 cents on the dollar. ‘People got 90 cents for free,’ Mr. Combs said. ‘It rewards immorality to some extent.'” Mr. Combs is a realty lawyer in Phoenix, AZ, who tries to negotiate deals with home equity line of credit HELOC loans.

Utah Loan Servicing chief executive Clark Terry buys defaulted home equity loans from lenders, and reports that he does not pay more than $500 for any one loan, regardless of how big it is, “Anything over $15,000 to $20,000 is not collectible. Americans believe that anything they can get away with is O.K.”

The delinquency rate on home equity loans was an astonishing 4.12% in the first quarter of 2010, down slightly from the fourth quarter of 2009, when it was the highest in 26 years of such record keeping, according to Mr. Streitfeld.

Mr. Streitfeld reports that during the “great boom” homeowners nationwide borrowed a trillion dollars from banks, using the soaring value of their homes as loan security. With the money now spent, some homeowners cannot pay. Surprisingly, it seems that delinquencies on this type of debt is greater than all other types of consumer loans, including auto loans, boat loans, personal loans and even bank cards like Visa and MasterCard. Mr. Streitfeld cites info from the American Bankers Association on this point.

Ideas for Action: Is it time to contact your second mortgage company and negotiate–offering 5 to 10 cents on the dollar?

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