Hi, always had great input from this forum… I’m not from the US so I don’t have first-hand experience with HELs. But I was wondering about the following situation: Let’s imagine I want to buy a new house that’s worth 100,000$. I take on a loan for 80,000$ and bring with me 20,000 equity as down payment. Now, my mortgage lender pools my loan together with many others and sells it to a bank, which in turn securitizes them as MBSs. Let’s assume I and the other borrowers are not subprime, so we are creditworthy enough to get additional loans. Now suppose I want to buy a nice big 50" LCD TV, a PS3 and a brandnew state-of-the-art sound system to put in my house. I go out and take on a Home-Equity loan… Will I be able to get a HEL in excess of 20,000$? And more importantly, as far as I understand, the MBS has the ENTIRE house as collateral. So in case I can’t make my mortgage payments, they are allowed to sell “my” house and retrieve as much as possible from the sale to get their 80,000$ back, right? Let’s assume they get less than 100,000$. Does the HEL lender then get back only the residual - in case there is any - AFTER the mortgage lender has been repaid? Who has seniority as creditor? And can I really borrow “twice” against my house?
Your friendly neighbohood banker would explain all this too you. First, securitization has almost nothing to do with the answer. In general, you don’t care if your loan is securitized and are usually only aware of it from some consent form that there is no reason I know of not to sign. So anyway… You have 20K equity in the house. The short answer is that you can get a HEL for almost any number up to your equity in the house, but the security of the loan is diminished the closer you get to your equity so fewer and fewer places should be willing to give it to you and for worse and worse rates. Of course, if real estate appreciates and your house is worth $150K you now have $70K in equity so the same thing applies to $70K, not $20K. So if you can’t make mortgage payments on the first mortgage (and presumably you aren’t making payments on th HEL) the first mortgage lender forecloses. As you say, the first mortgage holder has rights to the entire house so the second mortgage holder is in jeopardy and will be named as a defendant in the foreclosure action. If there is enough money to pay off both of them, the second mortgage holder needs to do not very much to get paid off in the foreclosure. If there is not enough, the second mortgage holder might get paid something and then can get a judgment against you. A judgment is not nearly as good as a secured loan and if foreclosure moves to bankruptcy, the second mortgage holder will probably be SOL. You can also borrow as many times as you want against your house as long as you properly disclose all other loans (applying and accepting 10 HEL’s at the same time gets you sent to jail) and have equity to cover it. The first loan on the books gets seniority, then the second, then the third, etc… Two other interesting aspects of this: 1) The HEL defaults and the primary doesn’t: To foreclose, the HEL holder needs to buy the first mortgage and then foreclose. This might prevent you from giving a second mortgage on a place with a $20M first mortgage. 2) You want to refinance the first mortgage but the second holder wants to be paid. The second mortgage holder would become primary if you refinance he first so he has choices. If you hold mortgages, you might get a call from soe slimy guy who will tell you that “as a formality” they would like you to sign a subordination as a second mortgage holder. Yeah right. I own senior debt but I will just subordinate it because you want me to.
good explanation joey. I always enjoy a refresher on something I have not reviewed in a while.
I can only repeat the previous words…thank you for clarifying this, Joey.
I believe some lenders will grant “over equity” loans where the HEL may be on a claim greater than the residiual equity in the house. I think state laws govern these practices but they are possible.
Yep, but that’s just a personal loan with a tax evasion feature.