Sarah had a great, well paying job. Her credit score was high. The value of her home had come back from the ravages of the housing crisis. Now, she wanted to get a home equity loan so she could build a music studio in her house and add wheelchair ramps and bathroom bars for her husband, a disabled veteran.  She applied to her longstanding lender to refinance her mortgage and borrow against her equity and guess what?  She was denied.

Sarah went to three more banks asking for the same thing.  Surely, one of them would recognize her solidity, she thought.  No.  Not one of them did.  Why wasn’t she approved? Her mortgage covered both her home and the land adjacent to it and that was the deal breaker.

Sarah is not alone here.  Many households would like to borrow through their home equity credit lines or cash-outs from loan refinancing. The web of lending regulations put into place after the financial crisis, however, has not been eased.  Banks aren’t pushing to get them eased either…they’re still gun shy from the defaults during the recession.

Today, housing equity now equals 58% home values, the highest point since 2006. These statistics almost don’t matter in today’s lending, or lack of lending environment.  “It’s harder to do a cash-out refinancing or get a home equity line of credit than it used to be,” said Karen Dynan, chief economist with the U.S. Treasury Department in the Obama Administration.  The fact that the banks are demanding nearly pristine credit “…has dampened the housing wealth effect…” or, the tendency of households to spend more when home values rise.

This inability to tap home equity is one of the major reasons that the U.S. economy is slowing.  Home owners used to be able to borrow against their ownership interests so they could renovate their homes, buy cars, take vacations, etc.  This is the type of borrowing that helps accelerate consumer spending, the primary fuel of the U.S. economy.

Even though Americans are carrying slightly more overall debt now, according to data from the Federal Reserve Bank in New York, that debt is primarily student loan debt, not the kind of debt that fuels consumption.  The fact is that credit card borrowing and housing debt remain well below pre-recession peaks.  Until that changes, along with lending regulations opening up a bit, people won’t be borrowing.

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