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1987-07-06
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96 lines
Finley,
HOME EQUITY, p.
»
Copyright
[c] 1987 by Michael Finley Writing Services
2096 Dayton Avenue * St. Paul MN 55104 * (612) 646-4642
MONEY
ON THE HOUSE
Home
Equity Loans Are the Hottest Bank Ticket in Town.
But HELs Make It Pretty Hot for Strapped Consumers, Too.
By
Michael Finley
No
doubt about it -- home equity loans are the hottest consumer product
in America today, in both growth rate and in even dollars. Consumers
seem to think nothing of putting their homes at risk to finance things
they've always wanted.
And
banks are even crazier about HELs -- the second mortgage market is
poised to jump from $175 billion last year to an estimated $400 billion
by 1990, fueled mostly by HELs. Big banks are dining on a course
of home equity lending, and small banks are mopping up the gravy.
What could be hotter than HELs? Consumer wrath, for one thing.
Godsend or not, home equity loans may be too much of a good thing.
To easy to get hold of, yet too dangerous for many to hold onto.
They are a classic example of the mixed blessing.
The attractions are none too subtle. Consumers love the low rates.
With auto loans averaging over 10.5%, personal loans at about 15.5%,
and credit card rates sometimes topping 20%, home equity lines ranging
between 9.25% and 11.25% are a darn good deal. In addition, home-related
borrowing is one of the few fully deductible interest payments left
after the Tax Reform Act of 1986.
In addition to that, there are some real bargains out there -- Citicorp
is offering an 8% promotional rate through September, and other banks
are jumping on the discount bandwagon.
Danger seems ever so remote, with defaults on home equity loans,
and the attending jeopardy for the collateralized home, insignificant
-- less than .5% nationally. First Bank System, after four years
in the home equity lending business, says it has yet to charge off
a loan.
So what's the big deal? The big deal is that people are signing
off their homes in record numbers, often for frivolous projects,
and not examining the details of the loan with much care. Generally,
it's a matter of fine print or missing print on ads and contracts.
Advertised bargains and industry rumors can mislead -- despite ballyhooed
discount rates, there's no discount at the top rates. Most midwestern
banks set their top rate at the usury limits for their state, with
the rest not far below, from 16-18%.
No one is speaking up front and out loud about the very real risk
factor. Unlike regular consumer loans, where homes are exempt from
repossession in some states, the home is the very thing that is at
risk with a home equity line.
After all, a home equity loan is really only a supercharged second
mortgage, with the same risk of losing the home of a traditional
second mortgage -- and it's much easier to get and to use. Stephen
Brobeck of the Consumer Federation of America
(CFA),
calls them "land mines that can be triggered by income loss, higher
inte≥est payments, or a large balloon payment. The resulting explosion
could destroy ne's home."
As a>ther banker has described it, consumers are of a mind to "charge
a blouse, put a lien on your house."
Remember, consumer service debt is already scraping the ceiling
at a record 18% of disposable income. How many people, already deeper
than they appreciate, will hesitate to buy that new car knowing they
can stretch payments out 240 months instead of 48? The magic 40%
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