Home Equity Fast Facts

• In 2001, homeowners had $445.1 billion in home equity debt on top of primary mortgage debt.
• By 2005, this home equity debt had doubled to $913.7 billion.
• Nearly one-third of all money borrowed from equity between the years 2000 and 2005 was spent on cars and other types of consumer goods.
• In just three years (2003 to 2006), the interest rate on these home equity products doubled, increasing from 4 percent to 8.25 percent.

Source: Alan Greenspan/James Kennedy Equity Analysis, 2007

Lenders Hide the Piggybank

Last week, the Federal Deposit Insurance Corp (FDIC) announced that delinquent home equity lines of credit increased by 16.6% in the second quarter. And lenders are starting to get nervous.

Many lenders, like super-giant Quicken Loans, have eliminated home equity loan and credit line products altogether. Bob Walters, Quicken Loans' chief economist, attributed this change to lack of investor interest.

Since the fall of the subprime market, many investors decided to stay away from second mortgage products. And with Freddie Mac and Fannie Mae and avoiding second mortgages like the plague, very few parties are out there willing to take on the risk of what is considered a 'non-conforming' loan.

Those lenders who haven't eliminated offering home equity products altogether have at least changed the way they do business. For instance, National City Corp no longer sells home equity loans that were generated by brokerage firms, and are limiting the loans to their own branch offices.

'This is one of a number of steps National City has taken...to help ensure that originations are in line with existing and anticipated market conditions,' the company said in a statement. 'We're continuing to closely monitor the market and to take appropriate steps to best navigate market conditions.'

Another example is Chase, which has severely tightened its credit guidelines for all home equity products. A spokesman for this company says that the restriction is meant for those borrowers with weaker credit who live in markets with declining home prices.

Given the current state of things-falling home prices, rising inventory, and increased number of defaults-it's likely that home equity loans will become harder to obtain no matter where a borrower may live.

'We're fast approaching the price decline rate seen at the end of the 1990-1991 recession, and the odds strongly favor our blowing past this mark in coming months,' Joshua Shapiro, chief economist for MFR Inc., wrote recently 'With supply overhang growing and mortgage financing tougher to obtain, home prices are going to soften considerably in the quarters ahead.'

Of course, limiting home equity borrowing might be a good thing. Americans have a bad habit of living well beyond their means. Remember, one-third of all money borrowed from home equity from 2000 through 2005 was spent on consumer good such as cars. Using home equity to buy these items was a very expensive way to go into debt.