Easy access to home equity loans during the housing boom put borrowers who extracted home equity at more risk. Declines in home prices are felt more severely by people who took out home-equity loans. Middle-class crush and banking system burdened by excessive risk.
Second-lien mortgages are heavily concentrated on bank balance sheets, nearly 75% of the roughly $950 billion outstanding. And 38% of borrowers who took cash out of their property owe more than their home is worth. Over 40% of that debt is on the books of the nation’s four largest banks: Wells Fargo & Co., Bank of America Corp., J.P. Morgan Chase & Co., and Citigroup Inc. Pending write-downs/write-offs brings down the big lending houses.
Economists say borrowers with second mortgages on homes that are underwater are far more likely to walk away from their homes. Selling your property for less than the value of the outstanding mortgage, becomes much harder time in case of a second loan. All the lenders involved must agree to take losses on the sale, and second-lien holders take the first losses in such a situation.