rebuild.org finance news:

Back to Latest News Headlines

News That Affects Home Equity Loans

[Jan 1, 2010.]


What Happened to Home Equity Loans in 2009

As the economy contracted and the housing market went through the most severe adjustment in decades, bankers reduced or froze home equity loan balances. Many people who were in the middle of a remodel or other project saw the credit line they thought they had just disappear. More than one class action lawsuit was filed for unfair banking practices against home equity lenders. Originations on new home equity loans were at a record low with no sign of returning to the extraordinary levels of the height of the housing bubble. Homeowners had to scramble to find other sources of credit for debt consolidations and home improvements.

On the bright side, interest rates remained at record lows for the entire year. Most home equity loans have adjustable interest rates based on prime rate. Prime rate typically tracks the fed funds rate plus about 3.00%. Because the Federal Reserve was desperate to ward off a second great depression, monetary policy was extremely loose. The fed funds rate was targeted at 0.00%-0.250%, making home equity loans very, very cheap loans to use.

Where Home Equity Loans Will Be in 2010

There are some signs that home equity loan originations are picking back up. Bankers are slowly wading back into the home equity loan origination waters. Originations are likely to be conservative for some time because home values are still in the process of re-stabilizing. Loan approval guidelines have tightened. Credit score requirements have been increased. The profit margins the banks require over the Prime Rate have increased from an average of 0.500% to in some cases as high as 3.00%.

According to almost every economist on the planet, interest rates have to increase soon. Keeping the fed funds rate at the current historically low target for much longer is dangerous. As the economy gets stronger and GDP continues to grow (it is expected to grow at an average of 3% in 2010), there is a risk of an overheated economy with runaway inflation. The Federal Reserve is watching inflation signs very closely. It will start to increase the fed funds rate and tighten monetary policy at the first sign of inflation.


About Author:

Renee Morgan has been a loan officer for over eighteen years. She is also a freelance writer and guest expert for radio and TV.

news subscription:

Easily subscribe to the rebuild.org news feed.

Read our news without even visiting our site!

Subscribe to our news


news archive:

Rebuild.org monthly news archive