Help Me, Help You ... Help Me

Bank of America has announced that it will start helping customers that are holding mortgages that are under water, which means that the owners have negative equity on their property because the loan is higher than the value of the home, by reducing the value of the loan. The maximum reduction would be around 30% of the value and homeowners would have to show hardship. Equity had been one of the most secure ways to acquire loans or lines of credit for homeowners. It is basically a loan that has as collateral the excess value of your home. People would use these loans to cover a range of things from redesigning their homes, to paying for education, to paying off other debt, such as credit cards and other high interest loans. These loans were collateralized (bare with me, I just want to make sure this is clear) which in turn meant that if the holders of the mortgage and now the home equity loan, were not able to pay for any reason the bank would take over the home and be able to sell it and potentially come out without accruing any type of a loss. Those days are over and have been over for a while for the homeowners and for the banks. For the most part homeowners do not have access to these loans anymore, which has pretty much eliminated that market from the economy, and banks are scrambling to try and keep homeowners in their homes. Disguised as an attempt to help homeowners, banks don’t want to hold on to these assets that have lost so much value. If they were to take over these homes they would have a very hard time getting rid of them and if they did, it would be at a very steep discount, incurring a substantial loss. So they prefer to keep at least some money coming in than to have to take over the homes and find buyers. But why were all these subprime loans made? Why did so many companies put themselves in this position? Did they think that after people who could not afford their mortgages in the first place left their homes they could turn around and resell them without a loss? Maybe, since this mess seems inexplicable. Now we’ll just have to wait and see how it all unfolds.