Tags: home | equity | line | credit

A Ghost of the Housing Meltdown Returns: HELOCs Are Baaack

By    |   Friday, 07 March 2014 11:51 AM

Home equity loans — the personal piggybanks that hordes of Americans abused in the lead-up to the 2008 housing meltdown — are back again in popularity and surging higher than ever.

The loans actually surpassed 2009 levels in 2013, as $111 billion in new home equity lines of credit (HELOCs) were taken out, according to industry data cited by Credit.com.

The development may not be a bad sign for the economy, said Alan Ikemura, senior product manager at Experian Decision Analytics.

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He said there are indications consumers are using HELOCs this time around for practical purposes like home improvement or to pay for college tuitions instead of for extravagant purchases.

"The consumer that you see today is more responsible with the potential lines. It's still discretionary, but I think it's more of a need-based thing."

The fact people are able to use HELOCs may also be an indicator of a healthy housing market.

"This specific product itself is finally coming out of this lull that we've been in for the past few years. We believe it to be an outcome of an improvement in the (home) price appreciation across the country," Ikemura said.

The average credit limit per HELOC loan has increased for most borrowers, according to Credit.com, and consumers with poor credit are beginning to have better access to HELOCs because overall delinquency rates for the product have gone down.

But The New York Times noted there may be ghosts from the past lurking in the HELOC closet in the United States.

For instance, many of the HELOC loans that were aggressively marketed from 2004 to 2007 are starting to come due now. That's because those equity lines typically have a 10-year period during which the borrower can use the line of credit and pay only interest.

However, at the end of 10 years, the borrower is required to start paying both interest and principal on the outstanding balance to pay it down, which could add up to hundreds of dollars more per month.

The Times said the U.S. Comptroller of the Currency's office is urging lenders to assess their level of HELOC risk and to reach out to borrowers whose loans are coming due.

Jeffrey Taylor, managing partner of Digital Risk, said it is unclear how the HELOC resets might affect the nation's housing market.

"Do they realize they have a situation where their payments could triple?" Taylor said of the borrowers. "Are we going to see people having challenges making those payments? As 2014 plays out, we're going to start to hear more about all of this."

HELOC loans are riskier for lenders than first mortgages are, the Los Angeles Times noted, because first mortgages are paid off first in case of a foreclosure.

One mortgage broker told the Los Angeles Times that in high-end markets, which recovered first in Southern California, some borrowers are now using HELOCs of $100,000 to $250,000 "as a financial tool" to buy more real estate.

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Home equity loans — the personal piggybanks that hordes of Americans abused in the lead-up to the 2008 housing meltdown — are back again in popularity and surging higher than ever.
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2014-51-07
Friday, 07 March 2014 11:51 AM
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