More lenders dropping bad home loans

A real estate sign announces "New Price" in front of an existing single-family residence for sale in Park Ridge, Ill.

TEXT OF STORY

BOB MOON: There's word of a new twist to the mortgage default mess. Today's Wall Street Journal is reporting that home lenders are increasingly walking away from fights over delinquent home equity loans. With home values sinking, in many cases it seems it's not worth the cost of foreclosing.

I know what you're probably thinking, but as Marketplace's Steve Tripoli reports, that doesn't necessarily mean a free ride for borrowers.


STEVE TRIPOLI: Home equity lenders are only second in line for payment in foreclosures. They're behind the first mortgage lender, so chasing borrowers may not leave enough for them even if they successfully call the loan. Greg McBride is with Bankrate.com.

GREG McBRIDE: Second-lien positions are riskier, even in good times. However, the easy underwriting guidelines of the past few years are now biting back both borrowers and lenders as home values slump.

When home equity lenders don't foreclose, delinquent homeowners get out from paying -- at least for now.
But lenders are still leaving liens on these houses. So McBride says owners may not skate-free forever.

McBRIDE: You can pay them now or pay them later, because the reality of it is the lien stays attached to the home, and that's ultimately something that will be collected if you go to refinance your loan, or later sell the home."

This does give pinched borrowers some breathing room. In the meantime don't expect banks to broadcast these concessions. With $1.1 trillion worth of home equity loans outstanding, they don't want more borrowers getting ideas.

I'm Steve Tripoli for Marketplace.

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