Regulators Raise Alarm On HELOC’s and Interest Only Loans

The Washington Post is reporting that Federal banking regulators have warned banks and other lenders to be more selective about who can get home equity loans and lines of credit because rising interest rates may make it harder for people to repay their loans.

Federal regulators also urged lenders to review interest-only loans, which allow borrowers to delay principal payments for years, and “no-doc” loans, which don’t require documenting borrowers’ assets and income. They also suggested that lenders that refuse to do so may find themselves facing heightened federal oversight.

For consumers it might mean not being able to tap into your home equity as easily as you might think. Since HELOC’s are tied to short term rates, any jump in rates will hit your pocket book wihin a month. This becomes and issue when rates are rising, like it is now. Additionally, banks have been making interest only loans more readily available so the consumer can buy a bigger home – if they want.

Why is the fed concerned about these “local”, “market” issues? Well because one legacy of the great depression is that banks are insured to a point by the Federal Government. If banks start ot fail then the government has to pick up the tab – and try to stop wide scale failure – something the government didn’t do during the Great Depression. Hence, the government is always concerned when banks start treading in thin ice – lending on “no doc” and “interest only is one of those risky areas.

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