Mortgage equity withdrawal or MEW is the process of removing equity from homes and converting this into cash for other expenses. There are several types of withdrawals that can be made, including single sum equity loans that borrow against the equity in a home or the home equity line of credit (HELOC). The latter allows people a certain amount of money that they can remove as needed and replenish with payments. This is also drawn on the equity on the home, and it can gradually diminish equity amount, particularly if home prices decrease or stay static. MEWs are considered one of the leading causes of the enormity of the housing crisis that hit the US in the early 2000s, though they are certainly not its only cause.
There are plenty of charts and graphs to show a significant increase in mortgage equity withdrawal practices in the US in the 1990s and early 2000s. This was when housing prices were increasing, so that many homeowners did not feel it made much difference to obtain something like a HELOC. Since housing prices also went up, most homeowners were acquiring new equity all the time. This attitude has been linked to greater consumer spending with a corresponding increase in Gross Domestic Product (GDP) at the same time.
Unfortunately for many homeowners, using mortgage equity withdrawal diminished the total equity in a home, and when housing prices started falling instead of rising, many homeowners found themselves not only without equity in their homes but possessors of upside down loans. This is when the amount owed on a home is more than the home is currently worth. The scarcity of lenders to even advance either single sum or HELOC loans became profound, so that even those with high equity levels in their homes weren’t always able to find them, or could only get the loans at unattractive interest rates. Not surprisingly, as many economists have pointed out, inability to use a home like a credit card dropped the GDP significantly, far lowering consumer spending and creating more problems for the economy.
Getting a mortgage equity withdrawal loan remains challenging in the US, but these loans are quite common elsewhere. They are used widely in the UK and in several other countries. Their instability comes from the fact that an unstable home market may cause tremendous loss in equity, and it is not always predictable that home prices will remain static or grow. Some financial advisors suggest that people look at all other loan options, even paying higher interest, instead of using mortgage equity withdrawal. They believe that the best choice for a consumer is not to deplete equity through loans, but to build it through thrift.
