Changing times affect equity loans, too

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By Lisa Rauschart, SPECIAL TO THE WASHINGTON TIMES

A home-equity line of credit (HELOC) once seemed the perfect solution for homeowners who needed cash. The economy was booming, house prices were at record levels and getting a mortgage never seemed easier. In those heady times of rising home values, drawing money on your home's equity seemed like a pretty good bet.

Most bets are off these days, however. Many banks are rolling back on the HELOC promise. According to an April survey by the Federal Reserve, about 70 percent of financial institutions reported they have tightened credit standards for new applications for revolving HELOCs, and half have reduced existing lines of credit. Just last week, Morgan Stanley, the nation's second largest U.S. securities firm, notified thousands of clients that they would no longer be allowed to draw money from their HELOCs.

Why the sudden stiffening of HELOCs? It's the economy, banks say.

"Banks are in the business of lending, says James Chessen, chief economist for the American Bankers Association. "They have to weigh the likelihood that they are going to be repaid. The weaker the economy, the greater the risk."

Meanwhile, some economists point to consumers.

"Basically, we spent much of the last decade with consumers aggressively using HELOCs with rapid balance growth," says Scott Hoyt, an economist with Moody's Economy.com.

That, economists say, is part of the problem. Too many homeowners using their homes as ATMs means that even while homeownership has climbed to record heights, home equity has fallen below 50 percent, according to the Federal Reserve.

"Homeowners have less equity to borrow against," Mr. Hoyt says.

The decline in home values has left some homeowners with HELOCs actually owing more than they own.

Late payments on home-equity lines of credit rose to an 11-year high in the first quarter of 2008, according to the American Bankers Association. Meanwhile, Moody's Economy.com reports that delinquencies on HELOCs were up 47 percent in the last year, although they remain the lowest category of consumer credit delinquencies.