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2006: A look back - A look ahead  
  Two events that accelerated home equity debt in recent years appear to be fading.
 Home equity
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HELOC rates surpass mortgage rates

Once upon a time, little Sallie Mae and her younger brother, Hud, were staying with their grandparents for the weekend. It was dark outside and the trees were bare.

"Read us a bedtime story, Grandpa," Sallie pleaded.

Grandpa scanned his bookshelves. "Missed Fortune," a book about growing rich through excessive mortgage debt, didn't seem appropriate for innocent ears. "The Loan Officer's Practical Guide to Residential Finance" would put the kids to sleep, all right, but for the wrong reasons. Grandpa stood there a long time, searching in vain for a children's book.

Grandpa was a mortgage man. Had been, for decades. He'd gone through all the noise: the skyrocketing rates of the early 1980s, the crash of the early 1990s, the boom of the early 2000s. The ups and downs had narrowed his focus, so the only tomes on his shelves were mortgage books, a Bible and an operator's manual for a belt sander. He was going to have to think up a bedtime story off the top of his balding head.

Hud said: "Don't tell us that story about the mean government bureaucrat who threw the nice mortgage broker in a dungeon for helping people with boo-boos to their credit. That one scared me."

Sallie said: "You're not going to explain amortization again, are you?"

Shaking his head, Grandpa tucked the kids in, sat on the end of Hud's bed and began the "Tale of the Equity Loan and the HELOC":

"Once upon a time, way back in the middle of 2004, when you spoke only baby talk, Hud a home equity line of credit was a lot cheaper than other kinds of mortgage debt. Home equity lines of credit were so popular that people gave them a nickname: HELOC."

Sallie said: "Like Jennifer Lopez is called J-Lo."

"Exactly," Grandpa replied. "Back in June 2004, before the Federal Reserve started raising short-term interest rates as a preemptive strike against inflation, the average rate on a HELOC was just 5.13 percent, compared to 6.3 percent for a 30-year, fixed-rate mortgage, or 7.83 percent for a closed-end home equity loan.

"Back in those days, HELOCs were as popular as Bratz and Pokemon. People were barging into my office and demanding HELOCs. One man almost got his eyes gouged out when he tried to jump in line ahead of a woman who was knitting a sweater while she was waiting to see me.

"But in the middle of 2004, the Fed started raising the federal funds rate every six weeks, and that meant that the prime rate was going up every six weeks, and HELOCs are indexed to the prime rate, so HELOCs were going up, too. By the end of 2004, what do you think happened?"

-- Posted: Nov. 1, 2006
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