NCPA - National Center for Policy Analysis

A Coming Wave Of Second Mortgage Defaults?

April 25, 2001

Some economists are raising alarms over the growing trend among homeowners to take out second mortgages or home equity loans. Some say that Americans are mortgaging their homes to the hilt -- and if unemployment continues to rise and home values fall, there will be a flood of defaults.

That would spell a heap of trouble for banks.

  • Homeowners deferred paying down their mortgage debt during the 1990s, so that outstanding debt set a record of $5.4 trillion recently.
  • One out of every four homeowners has a second mortgage.
  • And four out of five who refinanced last year opted to increase the size of their mortgages -- using the extra cash to pay bills, make home improvements or even take vacations.
  • The volume of second mortgages has more than tripled to $750 billion since 1993, reports SMR Research.

The result is that American homeowners are sitting on the smallest cushion of equity they have ever had -- and the problem for banks is about to become severe, experts warn.

Banks with home equity and mortgage portfolios spread over only a small geographic area are said to be at greatest risk -- since home prices tend to fluctuate regionally, not nationally.

Some lenders have put themselves in a precarious position by loaning 100 percent of a home's value -- or even sometimes up to 125 percent.

Source: Heather Timmons, "Trouble on the Home Front," Business Week, April 30, 2001.


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