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Tags: Morgenson | trouble | home | equity

NY Times’ Morgenson: Big Trouble Looms for Home-Equity Loans

By    |   Monday, 16 July 2012 10:05 AM EDT

The housing market may be showing some signs of life, but major problems lie ahead for home equity loans, says New York Times columnist Gretchen Morgenson.

“That’s because of the nature of home equity lines of credit, which require low payments in the early years followed by hefty payments later on,” she writes.

“For many borrowers, those later years are fast approaching.”

In the first few years, borrowers need only pay interest, and many indeed have declined to pay any principal yet.

At Wells Fargo, a hefty 44 percent of the bank’s home equity borrowers paid only the minimum amount due in the first quarter.

The Office of the Comptroller of the Currency says in a recent report that almost 60 percent of home equity loans will start requiring payment of both principal and interest between 2014 and 2017.

Many home equity borrowers are unprepared for their new financial burden. They can’t easily refinance their loans, because the value of their homes has decreased in many cases.

And most of the loans have adjustable interest rates, so if rates rise, the borrowers are in even more trouble.

Whatever problems are brewing in the home-equity-loan market, existing home sales are rising – to the tune of 9.6 percent in May from a year earlier.

“People have been on the sidelines now for five years,” says Douglas Yearley, CEO of home builder Toll Brothers, according to Bloomberg. “They’re coming back out.”

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Monday, 16 July 2012 10:05 AM
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