Why this type of second lien product can be a disaster for homeowners
As interest rates remain high, homeowners who need a home upgrade but are locked into low-rate mortgages are hesitant to sell their property. Instead, they are turning to second-lien mortgage loans to use the built-up equity in their property.
And while some homeowners are using that equity to upgrade their property, others are using it to consolidate high-rate revolving debt. With consumer debt at an all-time high, some borrowers are turning to high-risk second-lien products in an attempt to overcome financial difficulties.
Matt Gouge (pictured top), mortgage broker and founding partner at UMortgage, has seen it far too often. One product in particular that is getting borrowers in California into trouble is shared equity loans. He is urging customers to avoid these at all costs.
“I’ve talked to so many of these borrowers,” Gouge told Mortgage Professional America. “I was doing a lot of rate and term refinances and leaving these second liens in place. People were crying on the phone with me because they had no idea what they got into. Some people were pointing to the consumer and saying, ‘Well, they should have known better. They should have read it.’
“But who reads every page of 130-page financial documents when you’re buying a house? They bordered on predatory in my opinion. I’ve warned people that’s something to look out for.”
A lifeline with weights attached
Shared equity loans are a type of loan where borrowers sell a portion of the equity in their home to help close the loan. While the Consumer Financial Protection Bureau (CFPB) issued guidance on these types of loans in 2022, many remain in existence, and borrowers often lack an understanding of the potential issues associated with them.
“Someone who is in the market for a second lien, whether it’s a HELOC, shared equity, any type of second-lien product, they’re going to look at different options,” Gouge said. “Without knowing, they think shared equity is a smarter way to access their home equity. They can borrow money, sometimes with no payments.
“But you have to realize what you’re getting yourself into, because you’re essentially partnering with or selling a portion of your equity. Over the course of 10 or 20 years, you just don’t pay attention. Then, all of a sudden, ‘Oh, I borrowed $100,000, now I owe them $328,000.’ That’s interesting.”
These types of loans can seem very appealing, especially in the current economic climate. Market volatility has kept interest rates elevated, and potential tariffs are making day-to-day affordability challenging. It can make people desperate, which Gouge said makes them susceptible to these types of loans.
“You can’t let some of these companies operate without guardrails,” he said. “A person who’s in a position where they need cash, where they have $80,000 in credit card debt, they’re drowning. They’re scared. They need a lifeline. Let’s make sure, as an industry, that the lifeline we throw them doesn’t have weights attached to it.”
Avoiding ChatGPT advice
Gouge said that some of these shared equity loans have made it so lenders don’t want anything to do with the file at all, not even to leave the second lien alone.
“My first-hand experience with it was when I was refinancing people, and ultimately, I can’t refinance them anymore,” he said. “All the wholesale lenders I worked with basically shut it down and said, ‘We can’t sell this first with this second lien attached to it anymore.’ So now they’re stuck. Not only did they give up a huge portion of their equity, but now they’re stuck with a first that they couldn’t even refinance when rates were lower.”
He said one of the biggest challenges he has seen with consumers is their desire to use AI chatbots to obtain mortgage advice instead of speaking with a trusted mortgage broker.
Tyler Hodgson, Executive Vice President of Growth at UMortgage, highlights that while affordability remains a nationwide challenge, uneven markets in major metropolitan areas mean buyers could face anything from seller concessions to multiple offers. https://t.co/RYbLHfiJTn
— Mortgage Professional America Magazine (@MPAMagazineUS) July 21, 2025
“A trusted advisor, who is a human being, is still the most valuable asset,” Gouge said. “I have people all the time telling me, ‘Here’s what ChatGPT told me.’ People are getting ChatGPT to scrape the info from the company that’s trying to sell you the worst product. You have to talk to a human being who has brokered loans for a decade to say, ‘Hey, I’ve talked to clients who use this product, and here’s why they are screaming from the rooftops that nobody should do this.’”
With borrowers struggling, Gouge urges brokers and consumers to be wary of companies offering these types of loans, as they could make a bad situation much worse.
“It’s something consumers need to be aware of, and probably more than ever,” he said. “Desperate times call for desperate measures. With credit card debt at an all-time high, home equity is the last resort or piggy bank that they may want to tap. They just need to know there are different ways to do it that may have vastly different impacts on your financial future.”
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