Home Equity Loan Problems May Spark Recession

Home equity loans have turned easy credit into imminent disaster for insatiable borrowers. Soon, America may slide head-on into a mortgage-fueled recession.

The current administration has racked up unprecedented debt, spending money as if there were no tomorrow. As the dollar continues to lose value, other countries have less incentive to invest in the U.S. Meanwhile, Americans depend on overseas goods, but it seems that our own biggest export is jobs and manufacturing facilities. But tomorrow will come, and it may bring a long economic recession.

Home equity loans break camel's back

Some experts believe that the straw that may break the proverbial camel's back will be risky and irresponsible use of home equity loans. A convenient way for you to keep cash flowing is to take out a home equity loan. If your house is worth much more than it was when you bought it, putting your house in hock could entitle you to a generous line of credit, freeing you to spend the money any way that you want. This fact is well known by millions of Americans, who now view home equity loans as a quick fix for financial problems, a fast track to temporary luxury and extravagance, or a simple way to pay for all sorts of things they really can't afford. Many homeowners now facing foreclosure admit that the trouble began when they used home equity to pay for such things as expensive weddings, high-ticket luxury cars, upscale wardrobes, nights on the town, and fabulous extended vacations. Even some prominent celebrities with highly lucrative careers have fallen into a sea of red ink, and many of yesterday's real estate millionaires are today's down-on-their-luck paupers.

Stormy economy

Because home equity loans are secured by real estate and are often structured so that they're tied to prevailing interest rates, today's economic climate creates the perfect storm of financial troubles. Plummeting home prices make it hard to refinance. Huge inventories reduce the chances of selling property quickly. Homeowners are left with few options for paying off mounting debts. Rising adjustable rates add insult to injury, by raising the price of servicing existing loans. It's quite common for homeowners to get trapped with no way out, as conditions grow steadily more catastrophic. Once the number of debt-burdened Americans reaches a critical mass, the nation will sink into a collective recession.

One way to curtail the economic crisis is for Americans to start saving more than they spend. The average savings rate--the amount typical U.S. households save each month-is at a negative level, not seen since the Great Depression. That doesn't bode well for the future if, instead of living with less, homeowners stay busy figuring out how to borrow more. Once foreign investors begin to ignore the U.S., the only way to lure them back will be to raise interest rates. With skyrocketing gas prices, higher rates on debt such as home equity loans may be a nail in the coffin for the domestic economy.