Credit crunch: Home equity lending evaporates

Hocking the house for quick cash is a lot harder than it used to be, and it's causing headaches for homeowners, banks and the economy.

During the housing boom, millions of people borrowed against the value of their homes to remodel kitchens, finish basements, pay off credit cards, buy TVs or cars, and finance educations. Banks encouraged the borrowing, touting in ads how easy it is to unlock the cash in their homes to "live richly" and "seize your someday."

Now, the days of tapping your house for easy money have gone the way of soaring home prices. A quarter of all homeowners are ineligible for home equity loans because they owe more on their mortgage than what the house is worth. Those who have equity in their homes are finding banks far more stingy. Many with home-equity loans are seeing their credit limits reduced dramatically.

The sharp pullback is dragging on the economy, household budgets and banks' books. And it's another sign that the consumer spending binge that powered the economy through most of the decade is unlikely to return anytime soon.

At the peak of the housing boom in 2006, banks made $430 billion in home equity loans and lines of credit, according to the trade publication Inside Mortgage Finance. From 2002 to 2006, such lending was equal to 2.8 percent of the nation's economic activity, according to a study by finance professors Atif Mian and Amir Sufi of the University of Chicago.

For the first nine months of 2009, only $40 billion in new home equity loans were made. The impact on the economy: close to zero.

"The home as ATM is yesterday," says Keith Gumbinger, vice president of HSH Associates Financial Publishers, which publishes consumer loan information.

Millions of homeowners borrowed from the house to improve their standard of living. Now, unable to count on rising home values to absorb more borrowing, indebted homeowners are feeling anything but wealthy.

Holly Scribner, 34, and her husband took out a $20,000 home equity loan in mid-2007 — just as the housing market began its swoon. They used the money to replace sinks and faucets, paint, buy a snow blower and make other improvements to their home in Nashua, N.H.

The $200 monthly payment was easy until property taxes jumped $200 a month, the basement flooded (causing $20,000 in damage) and the family ran into other financial difficulties as the recession took hold. Their home's value fell from $279,000 to $180,000. They could no longer afford to make payments on either their first $200,000 mortgage or the home equity loan.