Mortgage Problems

This is probably too arcane for most people, but if you are reading and hearing about the problems in the home mortgage market, most of what you read is about the sub-prime mortgages. In these, the bankers lent money to people who did not have the income or credit scores which should have been required before the mortgage was approved. On the other end there are prime mortgages which were taken out by borrowers with good credit and good income so they have been judged to be great credit risks. Most people do not realize that there are problems there as well. Here is what has happened in markets where home values have dropped (Florida and California, for example): Some of these great credit risks have taken out lines of credit with their homes as collateral. These are called home equity loans and many people use them to live beyond their means. Now some of these home owners are falling behind on these loans because they have interest rates which go up to levels which crimp the ability to pay. When this happens, the bank has a problem. Do they foreclose or not. In many cases, the bank owns the 2nd mortgage and someone else owns the first mortgage. So, if the homeowner does not make payments on the home equity loan, the lender in many cases decides to just let it go rather than try to take your house because if they did, the holder of the original mortgage would come first and the house in many cases could not be sold for the amount owed. If you are an investor in the bank, you should realize that they are carrying the value of this home equity loan on their books as an asset and it is in fact worthless unless some time in the far future the house happens to sell for enough for the loan to be paid. I would not consider that an asset and you should not either when considering whether to own shares in a bank.