As home prices continue to drop, HELOCs have become a greater risk to lenders. Losses on home equity lines of credit have skyrocketed during the past few months and many analysts believe this trend will continue for some time.

Financial Week reports:

“Home-equity lending has grown dramatically in recent years, more than doubling since 2002, to about $1.1 trillion outstanding this year, according to the Office of the Comptroller of the Currency. The growth was fueled by rising home prices, as borrowers found the equity an abundant source of consumer credit, and at rates of around 5%, less than half as expensive as the alternative, credit cards…

But as the decline in housing prices began accelerating last year, the collateral or equity supporting the loans began decreasing as well, sending lenders’ losses up. Traditionally, losses on home-equity loans run at around 0.2%. But in the fourth quarter of 2007, the rate spiked to nearly 1%, and by the end of the first quarter to 1.73%, according to prepared remarks by Comptroller of the Currency John Dugan, who was speaking before the Housing Policy Council of the Financial Services Roundtable on May 22.”

With this type of loss, it’s no wonder that HELOC lenders are tightening their standards and making it more difficult for new borrowers to qualify.

See Also:

How to Qualify for a HELOC

How to Negotiate a HELOC

Tags | Heloc, heloc crisis, home equity line of credit