Home equity borrowing has steadily gained
popularity over the past two decades while relaxed
lending standards in recent years have opened up this
option to a whole new set of borrowers.
Home equity lending took off dramatically
beginning in 1986, says home equity and mortgage lending
expert Richard F. DeMong. That's when the tax code
was changed to increase tax incentives for homeowners.
Since then, people have been able to borrow 100 percent
of their home's equity and even borrow against future
equity with loans for 110 percent or more.
Recently loosened standards, coupled
with a softening real estate market, have led to record
loan defaults and foreclosures. As the industry scrambles
to get its bearings and rethink the logic of some
of its subprime lending decisions, consumers should
take a moment to do the same.
Borrowing on home equity has become
an accepted solution of convenience, with one in every
five homeowners currently holding a second mortgage
or home equity loan, a 2006 Pew Research Center study
shows.
Fierce competition among lenders resulted
in easy applications, a fast decision process and
an increase in subprime lending (loans granted to
people with weaker credit or at higher-than-prime
cost). In fact, the subprime market grew from $90
billion in 1996 to $540 billion in 2004, Freddie Mac
figures show.
This shift has come at a price to both borrowers and lenders. Lenders have taken a hard hit recently, particularly in the subprime arena with a rash of lenders filing bankruptcy or going out of business. Even large companies have been hit by higher-than-expected default rates.
Lenders are expected to tighten their underwriting standards in wake of this, but it remains to be seen if borrowers will react similarly.
Homeowners have spent the past decade
treating their houses like ATMs while expecting them
to function as retirement funds. A November 2006 study
by the Pew Research Center found that the home comprises
"most" of the personal worth for one-third
of homeowners (34 percent) and "more than half"
for another third (34 percent). And despite changing
borrowing habits, these percentages haven't changed
in more than a decade.
If the home is the de facto American
retirement fund, when is it reasonable to draw on
home equity and when should it be treated as sacred?
Find out by reading "The
pluses and pitfalls of equity loans."
 | Has home equity funded your dreams
or turned into a nightmare? . |
-- Posted:
May 21, 2007 | |
