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Reducing HELOC Risks


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The HECM as a Risk Reducing Strategy for Older HELOC Borrowers

reverse mortgage newsRisk. It’s one thing we should help older homeowners reduce especially in their retirement years. Besides health care costs, long term care and unforeseen emergencies there remains one common risk that many homeowners and even reverse mortgage originators overlook. HELOCs or Home Equity Lines of Credit. Many of our prospective borrowers already have an appetitie for home equity as evidenced by their history of cash out refinances or more notably an existing home equity line of credit. HELOCs have begun to resurge in the mortgage market as home values have nearly recovered from their pre-crash values and today’s artificially low interest rates. While banks make these loans attractive to the average consumer what is often overlooked or not expressly pointed out are the risks and limitations.

First a HELOC can be taken away just as easily as it was given. If we see another fall in home prices those holding a HELOC could get the same rude awakening…

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  1. Buy nonrecouse? This is one of the biggest lies perpetrated by our industry in many states. Here in California even though we have recourse loans on homes, no lender or note owner in their right mind goes to court to seek a deficiency judgment against a defaulted borrower. If one pursues a deficiency judgment against a defaulted borrower, the cost of the procedure and the years it takes pursuing it makes this avenue so irrational that California is classified by real estate attorneys as a nonrecourse state. The same is true with a number of other states as well. The issue here is how lenders in your state handle defaults. In California lenders use the trustee’s right of sale to foreclose the home which requires that the lender forego all rights to a deficiency judgment against the mortgagor.

    If we are going to discuss risks of other loans with seniors, then we need to discuss the risks related to our own. While all mortgage borrowers may get locked into their homes if prices fall, the likelihood of being locked into the home with a HECM are greater since few pay down the balance due and so many have opted to take maximum proceeds in the past and may do so now after one year. On a HELOC, the balance due is being paid down over time.

    However, as a senior living in California, the pluses of a HECM generally outweigh its minuses, when it comes to HECMs versus HELOCs.

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