Equity Loans next up in credit crunch showdown

While most Americans may have been lulled into a false sense of security by heavy borrowing, they're about to rocked by the harsh realities of the credit crunch as recent figures show they owe a staggering $1.1 trillion on home equity loans.

With banks increasingly worried they may not get some of that money back, some are taking the extraordinary step of preventing some people from selling their homes or refinancing their mortgages unless they pay off all or part of their home equity loans first. It's an unusual step because in the past, when home prices were not falling, lenders did not resort to these measures.

Lenders holding first mortgages get first dibs on borrowers' cash or on the homes should people fall behind on their payments. Banks that made home equity loans are second in line.

In layman's terms this sees a nation that only half-owns its homes. With home ownership at record high levels, home equity has fallen below 50 percent for the first time, according to the Federal Reserve.

Persons with poor credit are likely to be most affected. More than a third of all subprime loans made in 2006 had associated second-lien debt, up from 17 percent in 2000, according to Credit Suisse.