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.

Scribner, who is a stay-at-home mom with three children, avoided foreclosure by striking a deal with the first mortgage lender, HSBC, which agreed to modify their loan and reduce payments from $1,900 a month to $1,100 a month. The home equity lender, Ditech, refused to negotiate. Scribner’s husband, Scott, works at an auto loan financing company but is looking for a second job to supplement the family’s income.

The family is still having trouble making regular payments on the home-equity loan. The latest was for $100 in November.

“It was a huge mess. I ruined my credit,” Holly Scribner says. “We did everything right, we thought, and we ended up in a bad situation.”

It’s a mess for the banking industry, too.

Home equity lending gained popularity after 1986, the year Congress eliminated the tax deduction for interest on credit card debt but preserved deductions on interest for home equity loans and lines of credit. Homeowners realized it was easier or cheaper to tap their home equity for cash than to use money taken from savings accounts, mutual funds or personal loans to fund home improvements.

Banks made plenty of money issuing these loans. Home equity borrowers pay many of the costs associated with buying a home. They also may have to pay annual membership fees, account maintenance fees and transaction fees each time a credit line is tapped.

In 1990, the overall outstanding balance on home equity loans was $215 billion. In 2007, it peaked at $1.13 trillion. For the first nine months of 2009, it’s at $1.05 trillion, the Federal Reserve said. Today, there are more than 20 million outstanding home equity loans and lines of credit, according to First American CoreLogic.

But delinquencies are rising, hitting record highs in the second quarter. About 4 percent of home equity loans were delinquent, and nearly 2 percent of credit lines were 30 days or more overdue, according to the most recent data available from the American Bankers Association.

A rise in home-equity defaults can be particularly painful for a bank. That’s because the primary mortgage lender is first in line to get repaid after the home is sold through foreclosure. Often, the home-equity lender is left with little or nothing.

Banks are applying the brakes.

Bank of America, for example made about $10.4 billion in home equity loans in the first nine months of the year — down 70 percent from the same period last year, spokesman Rick Simon says. The also started sending letters freezing or cutting lines of credit last year, and will disqualify borrowers in areas where home prices are declining.

“This was just solid risk management,” he says.

Jeffrey Yellin is in the middle of remodeling his kitchen, dining room, living room and garage at his home in Oak Park, Calif. He planned to pay for the project with his $200,000 home equity line of credit, which he took out in January 2007 when his house was valued at $750,000.

In October, his lender, Wells Fargo, sent a letter informing him that his credit line was being cut to $110,000 because his home’s value had fallen by $168,000, according to the bank.

He is suing the bank, alleging it used unfair standards to justify its reduction, incorrectly assessed the property value, failed to inform customers promptly and used an appeals process that is “oppressive.” Jay Edelson, a lawyer in Chicago who is representing Yellin, says homeowners are increasingly challenging such letters in court. He says he’s received 500 calls from upset borrowers.

Wells Fargo declined to comment on Yellin’s lawsuit but said it reviews of customers’ home equity lines of credit to make sure that account limits are in line with the borrowers’ ability to repay and the value of their homes.

“We do sometimes change our decisions when the customer provides sufficient additional information,” Wells Fargo spokeswoman Mary Berg said in a statement e-mailed to The Associated Press.

Work has stopped at the Yellin’s home. The backyard, used as a staging area for the remodeling job, is packed with materials and equipment.

“Now, I’ve got a backyard that looks like ‘Sanford and Son’ almost,” he says.

ADRIAN SAINZ

AP Real Estate Writer

Algonquin Commons. Photo from Inland Real Estate Corp.

After losing two of its largest tenants to bankruptcy, a big shopping center in Algonquin that opened five years ago now faces financial problems of its own.

Algonquin Commons, a 565,000-square-foot mall in the northwest suburb, is no longer generating enough cash flow to cover its loan payments. Its owner, a joint venture led by Oak Brook-based Inland Real Estate Corp., wants to restructure $92.1 million in debt on the property.

It is the largest local retail property to run into loan trouble in the current real estate slump.

Revenue at Algonquin Commons has fallen over the past year or so because of the deteriorating retail climate and the demise of its second- and third-largest tenants, Wickes Furniture Co. and Circuit City Stores Inc., which have liquidated after filing for Chapter 11 protection last year.

The property, at 1900 S. Randall Road, was 91% occupied at the end of September, down from 99% when the Inland joint venture bought it in 2006.

Algonquin Commons “has been impacted by the bankruptcies of Wickes Furniture and Circuit City and we are actively working to re-tenant those spaces,” an Inland spokesman says in an e-mail. “We also are looking to improve our position at the asset through negotiations with the lender.”

Though the Inland joint venture is current on loan payments, the property’s net cash flow fell to 0.95 of its debt service obligation in the nine months ended Sept. 30, according to a recent report by the special servicer.

The venture says “that due to the market conditions and property-specific conditions,” the mall is “unable to continue supporting monthly debt service,” the report said.

A growing number of retail landlords in the Chicago area face similar problems as retailers shut down stores and demand rent relief.

Among all property types, retail is the biggest source of trouble locally, with $1.3 billion in distressed loans, according to a recent report by Real Capital Analytics Inc., a New York-based research firm. Algonquin Commons is the largest local retail property on the firm’s list of troubled assets.

Completed in 2004, Algonquin Commons is a so-called lifestyle center, a high-end shopping mall with freestanding stores and sidewalks but no department stores, unlike an enclosed mall. A joint venture between Inland and the New York State Teachers Retirement System paid $154 million for the property in February 2006.

Algonquin Commons is secured by two loans totaling $92.1 million that were pooled with other commercial mortgages in 2007 and sold to investors in a commercial mortgage-backed securities (CMBS) offering.

In September, the Inland venture asked that the Algonquin loans be placed with the special servicer, a company hired to work out problem loans for CMBS investors. The loans mature in 2014.

The Inland spokesman declines to discuss specifics of the restructuring talks, and a spokeswoman for the servicer, Centerline Servicing Inc., also declines to comment.

A representative of the teachers pension fund did not return a phone call.

The Inland venture has asked Centerline to convert the outstanding debt to a cash-flow mortgage for five years, according the recent Centerline report.

The report doesn’t specify terms, but a cash-flow mortgage typically allows a borrower to pay a lender whatever it can after covering operating expenses and capital expenses, even if the payment falls short of the required debt service.

Centerline has rejected the proposed modification, the report says.

Algonquin Commons is one of 14 Chicago-area retail properties that Inland, a real estate investment trust, owns in its joint venture with the New York teachers pension fund.

Though the mall’s cash flow falls short of loan payments, debt service is paid out of operating cash flow from all the properties in the joint venture, the Inland spokesman says.

The Inland venture has told the servicer that it has no plans to stop making payments on the loans, according to the Centerline report. That could limit its leverage in restructuring talks: The special servicer may be less willing to cut a deal if it knows that the venture has no plans to walk away from the property.

Crain

By Alby Gallun

Modifying the mortgage terms of delinquent homeowners is one of the most debated concepts in Washington right now.

FDIC chairwoman Sheila Bair wants massive, across the board modifications — slashing hundreds of thousands of borrowers’ interest rates and monthly payments NOW — long before they fall into foreclosure.

House Financial Services committee chairman, Barney Frank, is threatening mortgage lenders with tough new regulations if they don’t modify customers’ loan terms quickly enough to keep them out of foreclosure.

Even the Bush administration has jumped on the bandwagon, calling for widespread loan fixes, even offering $800 cash incentives when loan servicers do so.

But here’s a politically sensitive question: How well do modifications really work?

Rob Dubitsky, a top researcher for Credit Suisse Group, says they’re not as effective as you might think.

In a study of reports from 19 major mortgage servicers, Dubitsky found that one third of all borrowers who received modifications fell back into serious delinquency within eight months, according to the American Banker trade publication.

For borrowers who received what Dubitsky called “traditional” medications to their mortgages — rate cuts or reworking of terms that added late fees and back payments onto borrowers’ principal balances — fully 44 percent RE-defaulted within eight months.

They either had to be given new and easier loan terms … or they simply went to foreclosure.

Only outright reductions of loan balances — something most lenders are reluctant to do – reduced the re-default rate significantly. But even then, Dubitsky found nearly one in every four borrowers later fell behind on payments.

None of this is a big surprise to long-time professionals in the default mitigation business. Joe Smith, president and CEO of Default Mitigation Management of Newport, Kentucky, says wholesale modifications — as advocated by FDIC’s Bair – are likely to lead to higher rates of later re-defaults and foreclosures.

Smith’s firm advocates more hands-on, individualized techniques to cure delinquencies, often involving counseling. Mass modifications without individualized underwriting and personal finance counseling, he says, “just pushes the problem down the road.”

But don’t hold your breath waiting for anybody in Washington — and certainly not the incoming Obama administration or Congress — to throttle back on their mass modification programs anytime soon.

And don’t expect them to do what’s politically much tougher: Ask banks to bite the bullet up front — write down principal balances early on so they don’t have to RE-modify vast numbers of mortgages – maybe over and over again — to keep owners out of foreclosure.