Have you noticed something about California property values, particularly Southern California over the past six or seven years? If you are the owner of either a single family residence or multiple properties, a home from the low end of the price spectrum to the high end, the same phenomenon has hit your real estate market. You know what the reality is: it's called deflation. Most of us never expected the sequence of events that have taken place during the decade of the nineties in Southern California. We have always had the hope that the home we bought would continue to increase in value. We planned and factored the increase into almost everything we do.
We buy a car . . . what better way to pay for the new vehicle than through an equity line of credit? We plan to send the kids to college . . . the goal was to use the appreciated value in our homes to make the burden a little more bearable. And, how better to plan for retirement than to live comfortably in our home with increasing home prices developing a lump sum nest egg for the future?
Unfortunately all that has changed. Home prices have come down. What we thought to be a sure bet has turned into something not so certain. The primary objective of home ownership (due to the deflation of home prices) seems to be the utilization of the dwelling as shelter and not so much as an investment for speculation. So, now what? What happens when the value of our home is lower than the loan on the property? What happens when we have developed a reliance on our home's equity to bail us out of situations such as over extension on credit cards or installment loans? Isn't it an interesting bit of irony that after the Christmas shopping season we are bombarded by advertisements addressing our need to refinance, take out a second mortgage or credit line to pay off high interest, non tax deductible credit cards? But now we have limited or no equity. Many programs call for 80% loan to value for equity lines, but our values have dropped by 20-40%. What are our options? More to the point, do we have any options? The answer is yes!
The financial market (mortgage lenders) inevitably responds to need and there is definitely a need. What has happened over the past 3 to 4 years is an explosion of loan programs that would have been unheard of just 7 to 8 years ago. We have gone from using a rigid structure of qualifying property at 70-80% of value for equity loans to programs that afford us the opportunity to cash out equity from our homes at 100% to 125% of the home's value. How can this be? It comes back to risk. What risks are lenders willing to take to develop business? Can these risks be justified so that investors both on Wall Street or throughout the world would undertake the purchase of these loans and continue the ongoing flow of money back to the home owner in equity loans? If the mix is right regarding both property and borrower there is a very good chance that the loan will happen and the return to the investor will be realized. If there is a deficiency (credit problems) with the borrower, the borrower will be required to pay a higher interest rate to offset the risk to the lender. Once the loan amount exceeds the value of the property, the lender is relying solely on the borrower to repay the loan. The past payment history of the borrower is at this point the primary determinant of the loan's interest rate.
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