Source: Federal Reserve

Prices are up, property tax assessments are likely up, you’re rich, rich, rich … on paper. According to researchers Black Knight, as of the end of 2017, Americans have $5.4 trillion in “tappable” home equity, an increase of $735 billion from the end of 2016. Tappable means that while total home equity, according to the Federal Reserve, sits at $14.4 trillion, only $5.4 trillion would be available using loan products requiring 20 percent equity remain in the property.

Put in perspective, $5.4 trillion is about 10 percent more than in 2005, before everything went to shit.  But there’s tappable and there’s tappable.  Three quarters of that equity is also held in mortgages with rates lower than current rates. Of the $5.4 trillion, approximately half is held by property owners with at least a credit score of 760 (qualifying for the lower refinance rates).


Fact: 40 percent of underwater borrowers hold home equity loans.

You know what’s keeping the Title Companies going don’t you—all those re-fi’s. Mortgage rates are at record lows, and the rule of thumb is that if you recoup the cost of refinancing in a year or two and plan to stay in the home past that time frame, refinance when rates are at a historic low and save money.

Of course, as Steve Brown points out, that formula doesn’t work if you are underwater on your mortgage. That is, you owe more than the home is worth. This is the scenario where you bring in a nice pile of cash to the refinancing table—few want or are able to do that.

Fortunately, that scenario is dwindling in Texas. According to the folks who track this at CoreLogic, three-fourths of U.S. homeowners who are underwater in their loans are stuck paying higher interest rates. Stuck because unless they take cash to refinance, it ain’t happening. (more…)

Furthering the discussion on whether the credit agencies are using a flawed algorithm to determine our mortgage future, this comment from Dallas bankruptcy attorney Reed Allmand, Allmand Law, deserves its own post. Most homeowners who are underwater on their mortgages got there through home equity loans that Allmand says were used to retire the same type of debt you find on credit cards. And that is what got so very many people into a financial mess. Me, I remember Texas when you could not borrow one dime against your home to protect the homestead:

I disagree with the premise that the Experian algorithm is flawed by classifying a Home Equity Loan as a Consumer Credit Loan. Before the state legislature changed the law to allow Home Equity Loans, the only type of debt that could impair a homestead was a purchase money loan (a traditional mortgage loan), a mechanic’s/materialman’s lien, child support lien, or a IRS tax lien. The argument for allowing home equity loans was to allow consumers to cash out the equity in their property and encumber their homestead with a new debt so they could use the proceeds as they please.

The consumer then uses home equity loan proceeds to make consumer purchases or retire other debt. Unlike a purchase money loan (traditional mortgage) the consumer is not borrowing money to pay off a piece of real estate and build equity in that property. Instead, they are cashing equity in a piece of property to make consumer purchases. This most often is a sign of economic instability in my line of work.

I am a Board Certified Consumer Bankruptcy attorney and I have seen too many clients enter into a home equity loan they should not have. Many times these loans are used to pay off credit card debt. If the consumer had not paid off the credit card they might go into default and possibly be sued but they could not have their home foreclosed on. That is not the case when a home equity loan is used to pay off credit cards, because if the consumer defaults on the home equity loan payments they are subject to foreclosure. I have counseled many clients in this situation and would definitely advise consumers to think twice before getting a home equity loan.

Reed Allmand is a board-certified Dallas bankruptcy attorney and principle at Allmand Law.

Recall last week when I told you about my friend Dormand Long, who has written to the Texas Attorney General because he believes Experian and other credit bureau agencies are wrongly lumping home improvement loans with consumer credit loans when they rate consumer credit. This is more important than ever today because mortgage lenders are looking for near-perfect credit scores when doling out home mortgages.

Here’s how this all started. Someone stole Mrs. Long’s Discover card and tried to get a cash advance. When she pulled her credit report and credit score through a credit monitoring service offered by credit bureau Experian and Discover, the Longs learned that Experian classified their home equity loan as an installment loan, not a real estate loan. Lenders tend to look more favorable on real estate loans and they are backed by the equity in the home.

The report also said Mrs. Long did not have any real estate loans. Well, gee, what do you call a home improvement loan?

Long’s dilemma and his letter to Texas Attorney General Greg Abbott caught the eye of Dallas Morning News reporter Pamela Yip, who is very finance savvy (sub req.). However, she interviewed credit experts who say it’s completely up to lenders to determine how they classify home equity loans.

“A home equity loan may be reported as either an installment loan or a revolving type line of credit,” said Tim Klein, spokesman for Equifax. “It depends on how it is structured and reported by the lending institution to us. And it does vary from lender to lender.”

Long’s credit report had said that too many installment loans can bring your FICA score down because they carry fixed monthly payments, which are sometimes viewed by lenders as negative because they may affect your ability to meet other loan obligations. But if it’s up to the bank to determine how they classify loans, it seems that our credit destiny is, once again, in their slimy little hands.

Another expert told Yip that a home equity loan isan installment loan,  is hardly credit-damaging and has much less of an impact on your credit rating than revolving debts. Which is the opposite of what Experian told Long.

Fun games. And this is a consumer who is just pointing out what could be a huge discrepancy. Can you just imagine the hoops home buyers are jumping through just to get financing. Used to be, all you had to do was fog a mirror… today you have to wine it, dine it and do everything but…kiss it!

What I want to know is, has anyone ever been denied a mortgage because of this issue? Too many consumer installment loans? CandysDirt wants to know!