Monday, December 29, 2008

Home Equity and Income Curtailments

The stereotype is the grasshopper home owner refinances or takes out a home equity line to buy that new big screen TV. No doubt to a certain extent that happens, but (via Economist's View) research shows:

..."In the early years of this century we saw a form of self-administered welfare payment develop where home-owners cash in on their homes, in boom times: to support children, smooth over a fall in income, or meet the costs of relationship breakdown." ...

I’ve previously talked about how income curtailment is usually the initial trigger for home defaults. This research suggests income curtailments were managed at least in part by drawing on home equity, but once that’s gone (or no longer available) defaults are more likely to occur. Lack of equity is also a factor in why workouts often don’t work; once the equity cushion is gone any income hiccup creates a new problem (more on that here).