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The End of Home Equity Loans

By: Steve Johnson

8/6/2008 - 16 Comments

The crashing housing market is pulling the carpet out from under home equity borrowers.

An article on Bloomberg.com today, says that Morgan Stanley is Freezing Home-Equity Credit Withdrawals.

“Morgan Stanley, the second-biggest U.S. securities firm, told thousands of clients this week that they won't be allowed to withdraw money on their home-equity credit lines” .. “Most of the clients had properties that have lost value”

“Wall Street firms including Morgan Stanley are ratcheting back on risks after the collapse of the subprime mortgage market and ensuing credit contraction saddled banks and brokerages with almost $500 billion of writedowns and losses. Consumers fell behind on home-equity credit lines at the fastest pace in two decades in the first quarter, the American Bankers Association reported last month. “

If the second-largest US securities firm is freezing home equity loans, I’m sure the other security firms will follow suit.  This is likely to be the end of home equity loans in America for at least the next decade and perhaps until the next housing market boom that was the only real support for home equity loans. 

Under normal housing market conditions, when home values increase with inflation, home equity loans don’t make a lot of sense.  It was only under the housing bubble conditions, when home prices were going up much faster than inflation that extracting the perception of a profit from a rising home price could be done with a home equity loan. Now that the perception of profiting just from owning a home is gone – home equity loans are no longer good for the lenders because they are not likely to get anything in return.

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