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Home equity loans pose new risks for banks

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Monthly payments on home equity loans are set to rise in about two years, due to the abundance of home equity loans made before the financial crisis and the terms associated with them, an article in the American Banker claims.

Banks face a high financial risk if they do not take the steps needed to identify borrowers who are at risk of falling short on payments.

According to the report, borrowers with a $210,000 mortgage and a $40,000 home equity loan can expect their monthly payments to jump about 26% when principal payments on the home equity loan come due. 

"Most of these [home equity lines of credit] were originated at the height of the crisis between 2005 and 2007 when credit-underwriting standards were dismal," wrote Thuy Nguyen, a Moody's Investors Service analyst. "As such, they are a particular concern."

Source: American Banker
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