Equity harder to tap as home values fall

Days of getting easy cash are over
Equity harder to tap as home values fall
November 11, 2007

BY SUSAN TOMPOR

FREE PRESS COLUMNIST

Flush real estate values for years meant that consumers could put little money down on a house, watch the home's value grow and then treat that added equity just like a bonus.

But the credit crunch has landed with a thud, falling particularly hard on Michigan. The days are over where practically anyone could turn the house into an ATM.


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In metro Detroit, we're watching the collapse of home-equity financing.
Homeowners here pulled $200 million out of their homes' value in the first half of 2007 -- compared with $2.2 billion in 2006 -- reports Equifax and Moody's Economy.com. The number had been as high as $4 billion in 2000.

This piece of havoc in the housing market is national and isn't just hitting people who borrowed way over their heads or are trying to sell the house.

We're looking at a legitimate threat to the overall economy, as homeowners discover that they can't bank on the house anymore to cover extra spending. Nationwide, consumers picked up roughly $800 billion from home equity in 2006, according to Equifax and Economy.com.

Home-equity cash could be spent on boring stuff like plumbing projects, but it was also was used on furniture, SUVs, vacations, college educations, business start-ups, paying down credit card debt -- you name it.

The troubling losses in home values won't put the emergency brake on most consumer spending, but we are looking at a sizable speed bump.

It is acute in metro Detroit, where "consumers are no longer able or willing to tap their home for cash to finance spending," said Mark Zandi, chief economist for Moody's Economy.com. "It's arguably the worst housing market in the country."

Hard times and horror stories

I've heard a fair share of horror stories during the past few months. A woman tapped into the equity of her house to unload credit card debt -- now she's looking at foreclosure. One couple saw a retirement strategy backfire. They downsized to a condo but still can't sell their house. So they plan to work more, not less.

Sean Gurskey, 37, took out a $22,000 equity loan on his Woodhaven home. He invested that money in a tanning salon that didn't work out.

Gurskey, who has worked for 15 years at the Chrysler Trenton Engine plant, now owes about $245,000 on a house that's worth less than the $265,000 he paid for it in 2003.

His monthly mortgage payment is $2,486 and set to climb in July when his adjustable rate goes up again. He's having trouble refinancing into a fixed rate because the home's value has dropped, he has that home-equity line and he filed for bankruptcy in 2005.

He said he hasn't missed a mortgage payment yet. He's working with two lenders -- one has the original mortgage, the other the home-equity line -- but he isn't getting any help so far to keep the payments lower.

"I'm the one that wrote my name down, but I didn't expect the housing industry to go down like it did," he said. "I wasn't expecting to lose all this equity."

Rising home values meant everyone -- even those who didn't tap into home equity -- could feel a little rich.

"The bubble that fueled a lot of consumer spending just isn't there anymore," said P. Brett Hammond, senior managing director and chief investment strategist for the Teachers Insurance and Annuity Association-College Retirement Equities Fund, or TIAA-CREF, in New York.

Now, people think twice about spending as much on their homes.

"We have things we'd like to do with our home, but we're not going to do any improvements right now because we don't want to take out a home equity," said Kris Marcath, 50, of Leonard.

She estimates that her home's value has fallen by $75,000 or more. She questions whether she could get $400,000 for the 2,700-square-foot home on 18 acres.

Pava Leyrer, president of the Michigan Mortgage Brokers Association, said Michigan's declining home values mean that even people who are paying their mortgages on time can find it difficult to refinance out of an adjustable-rate mortgage into a fixed rate or take out a home-equity loan.

"A lot of them are owing more on their homes than their homes are currently worth in Michigan," Leyrer said.

Leyrer, who is president of Heritage National Mortgage in Grandville, had one customer in the Grand Rapids area who had to borrow about $30,000 through an unsecured loan so he could sell his house. He brought that money, plus some savings, to the table to cover what he still owed on his mortgage and home-equity loan. The house -- once appraised at $380,000 a few years ago -- sold for $285,000 in July.

"It's extremely frustrating right now on these values," she said.

Going forward, three things will cut into borrowing power:

• Home values are expected to continue to trend down. "The values are coming in lower and lower by the day," said Steve Gornick, business development officer for Shore Bank in Detroit.

In some cases, he said, he has worked with homeowners who saw a 20% drop in the appraised value of a house in just six months in metro Detroit suburbs.

• Interest rates are no longer at rock bottom. Three years ago, the interest rate on a home-equity line of credit averaged 5.09%. Four years ago, consumers could find a rate as low as 4%. Now, the average is considerably higher, at 7.64%, according to Bankrate.com. • Lenders are edgy, especially in metro Detroit. "In markets where housing prices are weak, we want to keep people from owing more than the house is worth," said Tom Kelly, a spokesman for Chase in Chicago. "Nobody wins if you make a loan that they can't pay back."

Banks make it harder to borrow

Chase, Comerica Bank and other lenders already have slapped on tougher borrowing standards.

Homeowners in other weak markets, such as California, Arizona, Florida, Nevada and New Jersey, are finding stricter lending policies, too.

Take a homeowner in Michigan with a $150,000 house and a $120,000 mortgage.

A year ago, that homeowner could have gotten up to $30,000 in a home-equity line of credit or loan at Chase or Comerica.

Now, that homeowner would only be able to get up to $15,000 for a home-equity product, thanks to tighter lending standards. Chase put new rules in place in August. Comerica tightened standards in March.

What's key: That estimate assumes that the value of the house held true at $150,000.

If the value fell to $139,000, then the homeowner might be able to get only $5,100.

Chase and Comerica now limit borrowers in Michigan to financing up to 90% of their home's value. The old rule was a maximum combined loan-to-value of 100% of the value.

Some families are discovering that they do not have enough equity in their homes to take advantage of Oakland County's program for home-improvement loans. The county program offers up to $18,000 to families with low to modest incomes, provided there is sufficient equity in the house. The county typically does about 250 such loans a year. These loans have rates of 0% to 3%.

The worst is yet to come

Some experts warn that the housing slump will get worse in the next year to 18 months or so.

Zandi projects that metro Detroit's housing market could experience an average loss in home values of 25% from the high point to the low point. Values have already fallen about 14%.

Nationwide, he expects home values to decline 10% -- with another 6% to go in the year ahead.

Detroit, Livonia and Dearborn are listed as No. 1 among the Top 10 riskiest mortgage markets, according to First American CoreLogic's fourth-quarter forecast issued last month.

No. 2 on the list? Warren, Troy and Farmington Hills.

"Housing bubbles, they don't pop. They hiss," said Sam Khater, senior economist for the First American CoreLogic Inc., a company that provides data for the real estate business.

And that means it will be a long time before easy money will be on the house again.