Home-equity debt arouses concern

Experts fear a decline in realty prices might lead to houses being lost

April 06, 2003|By NEW YORK TIMES NEWS SERVICE

Americans are borrowing against their homes at unprecedented levels, leading some bankruptcy lawyers and consumer advocates to warn that many people could wind up losing their homes.

Homeowners raised $130 billion last year through home-equity loans and lines of credit, nearly double the total a year earlier, according to the Federal Reserve.

As long as their home values rise, borrowers who are having trouble making their payments can make further loans or can sell their homes for more than they owe. People have not fallen behind on their home-equity loans nationwide in troubling numbers.

But in parts of the Midwest and the Southeast where home prices have softened, delinquencies on home-equity debt have started to rise, and bankruptcy lawyers are reporting that a growing number of their clients are losing their homes to the banks.

Homeowners eager to lower their monthly payments have refinanced their mortgages during the past year, often taking cash out to maintain or increase their spending.

On top of that, they may have other loans.

Home-equity loans or lines of credit can be a good way to pay off credit-card debt, since they carry rates that are on average less than half those on credit cards. And the interest on a home-equity loan is tax-deductible, while that on credit-card debt is not.

Banks have been particularly active in extending this debt over the last three years. Total outstanding bank credit lines more than doubled, to $216.9 billion, as of January, according to Economy.com, a research company in West Chester, Pa. By contrast, credit-card and other revolving credit rose just 19 percent over the same period.

People who fail to make payments on the home loans or credit lines could wind up in more serious trouble in a bankruptcy than if they just had credit-card debt. In a bankruptcy, credit-card balances can often be written off. Home-equity loans and other mortgage debt must be repaid, or the property can be seized.

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