Dear Banker, Why Put A Lien On A Home That Lacks Equity?
Dear Banker,
Why put a lien on a borrower’s home which is already upside down and without equity? I understand the reasons, but I challenge the strategy.
Here are the benefits to the bank:
- By putting the lien on the home that is already upside down, the homeowner is more than likely heavily intimidated by the specter of losing their home. This is usually the sole reason the bank demands–and gets–the spouse to sign, making the home additional collateral to the loan. However, if there is no equity, the only advantage is emotional intimidation, instilling fear of losing the house. The bank has an emotional lever to pry more cash out of the borrower and to control the outcome more effectively. It is controlling the borrower through fear and intimidation because the family home is sacred to the family and the borrower in default will do anything they can to hold onto it.
- A lien prevents the borrower in default from filing bankruptcy, as bankruptcy will probably not remove the lien from the home. Thus, the homeowner cannot get rid of the debt.
Even though there is no possible financial return from this exercise because the house has no equity prior to the lien, this tactic yields results for the bank because of the emotional fears described above and this is a questionable bank tactic. Business should be done without resorting to such psychologically damaging tactics.
