An article posted on realtormag.com last week reports that more homeowners are tapping into their home equity. Loan originations rose 8 percent to almost $46 billion in the second quarter of 2017, the highest level since 2008, according to Equifax.
The article goes on to say that lenders are being more careful about how they’re issuing HELOCs, but are they?
Qualifying homeowners can take out a HELOC and spend the money any way they want. They don’t have to tell the lender what the money is for.
Just this week, I made a rare trip inside my local branch of a large, regional bank to do a small bit of banking and was subjected to sales pitches about refinancing my mortgage, taking out a HELOC, and getting a new credit card.
The banker told me the best time to get a HELOC is when you don’t need it, that way the line of credit is already there when you do need it. I told him I didn’t need one because I already had one, so he asked me what the interest rate was to see if he could beat it. He couldn’t. The point is: before he did the task I went in there for, he was trying to push products on me I didn’t want or need. And I don’t think that’s unusual.
And sure, borrowers tell lenders they’re going to use the money for their kids’ education, debt consolidation and home improvements, but how many homeowners succumb to temptation when they have a five-figure (or more) open line of credit and a longing for the beach in mid-February?
The last recession (should have) taught us many lessons, among them: many consumers just aren’t as savvy as they maybe ought to be. They love that HELOCs don’t have to be repaid right away, so they don’t always plan for the day the payments are due. Every homeowner loves the feeling that comes with having a lot of equity in their home, but refinancing to take that equity out most often lengthens the term of the loan and also means that money has to be repaid.
And what happens when housing prices fall, as economists tell us they inevitably will? What happens when the highly-leveraged homeowner finds him or herself out of work due to illness or injury?
We know what happens. We just watched it happen.
The article concludes by citing data from the Federal Reserve showing that U.S. banks held $387 in revolving home equity loans, which is more than 35 percent less than the $610 billion it held in nearly 2009.
Is that supposed to be comforting? We now know that far too many people had these kinds of loans in 2009. Knowing the amount is 35 percent less than “far too many” is cold comfort.