Americans struggle to tap home equity amid coronavirus pandemic

With the jobless rate spiking into the double digits, more Americans may look to unlock the wealth tied up in their homes to get through the crisis. Problem is, banks won’t give up the key. Lenders are increasingly turning away homeowners looking for equity lines of credit or a cash-out refinance, spooked by the surge in unemployment and the jump in requests by borrowers to skip mortgage payments.  After years of rising home prices and the longest stretch of economic growth in history, Americans have amassed $18.7 trillion in real estate equity, a cash cow that’s now untouchable, forcing some of them to seek other, less favorable alternatives. “This is a good lesson that home equity is a very illiquid asset,” said Matt Hylland, a partner at Arnold and Mote Wealth Management in Cedar Rapids, Iowa. “While home equity does make up the majority of many American’s net worth, you should never count on being able to quickly or cheaply access that equity.” Forbearance: ‘Anyone who needs it can get it’ As part of the coronavirus relief legislation called the CARES Act, homeowners with federally backed mortgages can request forbearance for up to a year, without fear of foreclosure. So far, forbearance requests have reached 3.8 million, according to the Mortgage Bankers Association. “It was very quickly done overnight and anyone who needs it can get it, opening up this huge unprecedented amount of people who could apply for forbearance,” said Brian Koss, executive vice president at Mortgage Network. View photos REVERE, MA: Rick Nazarro of Colonial Manor Realty waits in the driveway as a couple enters a property he is trying to sell during a “controlled” open house on May 2, 2020 in Revere, MA. (Photo: Blake Nissen for The Boston Globe via Getty Images) More Fannie Mae and Freddie Mac have promised to buy loans in forbearance from lenders to help keep the mortgage market working. But they refuse to purchase mortgages in forbearance that were cash-out refinances, making those types of loans riskier for lenders to originate and carry. As a result, lenders are upping their standards for these loans. Mortgage company PennyMac announced in late April that it won’t do any cash-out refinances that exceed 80% of the property’s market value.  Cardinal Finance, a mortgage lender in North Carolina, recently said it would only accept borrowers for cash-out refinances whose total monthly expenses are 36% or less of their gross monthly income, a more conservative standard than before. ‘We may have declining real estate’ Lenders also worry about Americans’ ability to pay back loans at a time when an unprecedented number of workers have filed jobless claims in the last seven weeks.  They also expect property values could dip, especially if the economy falls into a recession, increasing their risk on mortgages and other house-backed loans they hold. That’s caused major banks to pull back on issuing new home equity lines of credit, or HELOCs. Both Chase and Wells Fargo recently announced they would pause new HELOC applications. View photos A mail carrier walks along Wall Street as the coronavirus keeps financial markets and businesses mostly closed on May 08, 2020 in New York City. The Bureau of Labor Statistics announced on Friday that the US economy lost 20.5 million jobs in April. (Photo: Spencer Platt/Getty Images) More Lenders worry a borrower who becomes unemployed could default on the payments at the same time that home values are decreasing, eroding even more equity. If the lender is forced to foreclose and sell the home, it may not recoup what’s owed. “The lenders will have no profit,” said Kevin Leibowitz, founder of Grayton Mortgage. “The guy in the second position isn’t crazy to think that 10% can be wiped away.”  Turning to other funds instead

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