Who says American homeowners aren't rational economic actors?
The Wall Street Journal tells us today that defaults on home equity loans have become the latest "headache" for banks.
Oh sure, there is there is the requisite slapping around of those irresponsible spendthrifts who borrowed against their home equity to pay for "vacations and expensive electronics." But the nut of the article comes when the Journal's Robin Sidel explains that home equity credit lenders are stuck in a tough place when homeowners start defaulting.
While banks can foreclose on a first-lien mortgage, lenders often have little recourse when trying to collect a delinquent home-equity loan, especially if another bank holds the primary mortgage. Banks holding home-equity loans generally can only seize the collateral -- a house -- after the mortgage is paid off.
When another bank holds the mortgage and the mortgage payments are current, the home-equity lender is effectively powerless to collect the debt.
But here's the best part:
Unfortunately for home-equity lenders, many borrowers understand that pecking order, concluding there are few repercussions if they stop making payments on their home-equity loan. "Lenders are seeing people go delinquent on home equity who by all rights wouldn't be expected to go delinquent," said Dan Balkin of Wholesale Access, a Maryland research and consulting firm that specializes in the mortgage industry.
Lesson to would-be homeowners. Keep your mortgage lenders and home equity lenders separate! Lesson to banking industry: maybe all this slicing and dicing of real estate finance into separate bits wasn't so smart.
(Meta-econo-blogging note. Sometimes, after skimming the Wall Street Journal and The Financial Times, I turn to the econoblogosphere to see what I missed. Sometimes, as was the case this morning, I find that the econobloggers are all highlighting the same story that caught my eye. The Big Picture and Calculated Risk also chime in.)