Second mortgages weigh down owners, economy

Acquiring a mortgage loan

Tess Vigeland: Federal Reserve chairman Ben Bernanke said something today that we've been hearing for a while now: The economy will get better. High gas prices and the Japan earthquake put a crimp in the recovery, he told a banking conference in Atlanta, but growth should pick up in the second half of the year.

Ben Bernanke: Overall, the economic recovery appears to be continuing at a moderate pace, albeit at a rate that is both uneven across sectors and frustratingly slow from the perspective of millions of unemployed and underemployed workers.

Bernanke gave no hint of any action the Fed might take to help out with that situation. But he did point to one sector of the economy that could do its part: You and me.

Bernanke: As is often the case, the ability and willingness of households to spend will be an important determinant of the pace at which the economy expands in coming quarters.

Well the Fed itself said today that we are indeed spending money, but it's borrowed money. Mostly for student and auto loans. We are still cutting back on credit card purchases.

And another report today puts in stark terms the fallout from the bygone era of free spending and easy credit. CoreLogic, a housing data provider, found nearly 40 percent of homeowners who took out second mortgages now owe more than their home is worth. Marketplace's Stacey Vanek Smith has more.


Stacey Vanek Smith: Susan Lagg-May and her husband bought their home in Port Charlotte, Fla., nine years ago for about $250,000. They borrowed almost the full amount, and as home prices rose, they refinanced and took out a second mortgage.

Susan Lagg-May: Over the next couple of years, we found banks that were willing to increase that line. And they were just taking our word for it as to what we felt the value was.

May and her husband actively used that line of credit.

May: It started out paying off other debt; we did make improvements in our home, and we did buy an RV.

Now May is underwater. She owes about $350,000 on a home the county says is only worth $150,000. Today's report found people with second mortgages were twice as likely to be underwater as those with just one mortgage. And that puts them at increased risk of foreclosure, says Mike Fratantoni with the Mortgage Bankers' Association.

Mike Fratantoni: The number of homeowners who are underwater, a lot of that is second mortgage debt. It is going to be yet another hurdle for those borrowers to overcome.

And that spells big trouble for banks, says Harvard Business School's Nicolas Retsinas. He says unlike mortgage loans, which banks bundled up and sold off, second mortgages are still on their balance sheets.

Nicolas Retsinas: So the more we come to realize that second mortgages have no value, it's going to increase the capital requirements of banks and maybe put them in jeopardy.

Retsinas says that could mean banks tighten their purse strings at a time when business and other loans are needed to spur the economy.

I'm Stacey Vanek Smith for Marketplace.

About the author

Stacey Vanek Smith is a senior reporter for Marketplace, where she covers banking, consumer finance, housing and advertising.

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