Homeowners' equity fading away

Catherine Alexander, 61, who lives near Plano, Texas, first dipped a toe into home equity before taking a plunge.

After her husband died four years ago, Alexander moved from Seattle to Texas to be closer to her children, buying a $172,000 four-bedroom house with life-insurance money.

For more than a year, she shredded countless home-equity checks sent to her unsolicited by Beneficial, a member of HSBC Group. She finally cashed one for $6,000 to meet expenses after being unemployed for more than a year. That led to phone calls from Beneficial recommending a larger equity loan.

• Video: Beware of mortgage-rescue rip-offs

At the end of 2005, Alexander took out a $50,000 equity loan to pay for day-to-day expenses and charges related to her son's wedding. To satisfy that loan and to pay off her Ford Escort, she took out another home-equity loan the next year, this time for $93,000.

Alexander, who now works for Neiman Marcus, put her home on the market in May after her home and loan expenses became too costly. Even though she felt lured into the loans, she also blames herself.

"A lot of it has been my ignorance and being naive about my finances and in trusting people," she said. "I shouldn't have had a loan that size for my income, and I should've been more reasonable in the house I needed."

Fortunately, Alexander will receive more than half of the proceeds from a sale if she gets her $189,900 asking price.

Many homeowners can't afford to sell

For many homeowners who took out equity, what remains is scant. About 30% of the home-equity loans issued in 2005 and 2006 left homeowners with less than 10% of equity in their homes, the Mortgage Bankers Association said. An additional 3% now owe more than the value of their houses.

Now, homeowners trapped in unmanageable mortgages with little equity can't refinance or sell their houses for enough money to cover what they owe. Many of them face foreclosure.

Dropping home prices also threaten retail spending as the equity well runs dry. Homeowners won't be able to tap equity as easily for big-ticket purchases and may put more toward saving than spending as housing values fall.

Residential real estate represented 39% of a typical household's total assets in 2004, according to the Fed, whereas retirement accounts made up 11.4% and stocks just 6.3%.

No type of national bailout will replace that lost equity. Those who depended on it will have to rely on meager savings and other investments.

• Talk back: Do you think the government should bail out subprime borrowers?

Younger homeowners have more time to replenish the equity. But for baby boomers who took out cash from their homes every time home prices went up, their retirement incomes may not cut it.

"For lower- to middle-income homeowners who are relying on their homes as a source of savings, this will be very tough with declining home values," said Mark Zandi, the chief economist of Moody's Economy.com. "Particularly in context of reining in Social Security, Medicare and Medicaid. It's one more financial problem on top of mounting ones as they approach retirement."

This article was reported and written by J.W. Elphinstone for The Associated Press.

< previous |  1 | 2 |