Americans Using Home Equity Loans to Finance an Array of Purchases.

Byline: Janet Kidd Stewart

Aug. 25--Bogged down by more than $20,000 in credit card debt, Geraldine Maratea's ears perked up when co-workers chatted about consolidating their debts into lower interest home equity loans.

The 53-year-old school principal had built up nearly $60,000 in equity over the eight years she's owned her Bridgeport home, and an insurance estimate showed her brick two-story had soared in value from $157,000 at the time of purchase to $250,000, a far better return than her stock investments have given her.

After a quick on-line search of loan providers, Maratea picked up a fixed-rate home equity loan of $40,000, equal to her original down payment and enough to pay off the debts with a cushion left over for some new decorating plans.

"My monthly bill is now about $100 less than all the credit cards, and it will all be paid off in five years," said Maratea. "Plus, I can take the interest off my taxes."

With their stock investments plunging and interest rates at historic lows, Americans are turning their homes into ATMs, tapping their equity to fund everything from pizza deliveries to fancy new kitchens.

Money tied up in home equity loans, lines of credit and second mortgages has more than doubled in the last decade to a stunning $307 billion, according to the Federal Deposit Insurance Corp.

And with interest rates continuing to fall -- recently hitting lows not seen since the late 1960s -- still others are refinancing and taking a big chunk of cash out of their homes.

Evanston real estate agent Susan Kipley did just that last August, refinancing an Oak Park two-flat at 6.25 percent on a 30-year loan and taking out cash to remodel both units.

Kipley is confident the local housing market is still strong, and she still has a third of the property's value in equity. As a real estate agent, she still sees plenty of buyers out there wanting to trade up.

"People seem to be buying as much as they can buy, and money is awfully easy to get these days," she said.

Indeed. Warnings about a housing bubble be damned, homeowners are literally betting the farm.

Wendy Posnock this summer took out a line of credit on her first home to buy a four-unit building as an investment, netting a rate that stays a quarter point below the prime rate for the life of the loan.

"I was looking for some diversity in my cash flow, and I thought a four-tenant building would be easier to fill than a single [luxury] home," said the Oak Park resident.

After taking some big losses in the stock market this year, Posnock is more comfortable with real estate.

"Particularly so far in 2002, investors have chosen to put their dollars into homes rather than a faltering equity market," economist Gina Martin of Wachovia Securities noted in an Aug. 16 client letter.

Financial institutions, eager to keep the housing machine humming, are aggressively marketing products aimed at tapping home equity, knowing that it has been the American consumer propping up the economy in recent years as business investment flagged.

"Lines of credit that can be taken out and drawn down as needed are very popular today because they're tied to the prime rate," which has stayed low, said Brad Conner, manager of retail real estate lending for Bank One Corp. "It's very much a core product offering and we do quite a bit of marketing."

The bank offers a slew of promotions on its variable lines of credit, from $40 Target store gift cards to flexible lines that can be broken down into fixed rates for specific purchases.

Another big mortgage lender, Charter One, waives some fees for people refinancing their loans or taking first mortgages if they take a home equity line at the same time -- even if they don't need the money.

"The bank's mentality has changed. We've adopted a more aggressive sales culture," said Jeff Marshall, consumer loan sales manager in Illinois for Charter One. The bank has weekly call nights at its offices, where branches stay open late and loan specialists ring up previous customers to offer promotions on new loans.

The bank issues home equity line customers a card, much like an ATM card, instead of checks, emphasizing the ease of use.

"It looks like a credit or debit card and you can have it with you all the time," he said. Marshall himself whipped out such a card on a trip with his wife after she found a pricey ring.

Nationwide, underwriting has become more aggressive, according to a recent report from the American Bankers Association. The trade group said the maximum debt-to-income ratio surged more than 12 percentage points in the last two years. That ratio is the percentage of a borrow's income that is used to pay debt. Lenders will not approve a loan if the borrower's ratio of debt to income is too high. But they're making loans whose debt-to-income ratio is nearly 50 percent.

Also, more banks are expanding into high loan-to-value lending.

Charter One, among many others, offers loans for up to 90 percent of customers' equity. Some offer 125 percent, based on rising property values.

All that worries consumer groups and debt counselors.

"Once you take that loan, there's no going back. Your home is at risk," said Tiff Worley, president of Auriton Solutions, a non-profit debt counseling agency in Roseville, Minn. "If those funds are the only way you can keep up the mortgage, you should talk to a certified adviser before taking that step. On the surface it looks attractive but it's one more step to potentially losing your house."

The Consumer Federation of America has also issued stern warnings to homeowners about stretching themselves too thin.

"Using home equity to pay for consumption -- as opposed to investment -- is very dangerous," the association warns in a list of tips for refinancing. "Remember: Unsecured credit card debt does not put your home at risk, but an unaffordable mortgage does. If you cannot afford your credit card payments, reassess your spending habits."

The consumer federation notes that homeownership has increased precisely because banks have eased credit requirements, but that some consumers are dangerously close to their limit. The group urged people not to borrow more than 80 percent of their home equity.

"It could be a tremendous problem," said the consumer federation's legislative director, Travis Plunkett. "If somebody is leveraging their home -- their biggest asset -- it's their savings and a major tool for building wealth and retirement security. If they are leveraging the home for an investment that will pay off, like home improvement or education or a new business, that can be a positive tool if done carefully. But above a certain point it gets to be dangerous."

Maratea still feels comfortable with her decision to take the equity loan to pay off credit cards. She traded a double-digit credit card interest rate for a fixed 8.25 percent rate on her Bank One home equity loan.

Even though she probably could have found a lower rate with more shopping, she felt comfortable with Bank One's history (several family members worked for the predecessor First National Bank of Chicago) and with the ease of using the bank's Web site for the loan application process.

Plus, job stability and her ability to pay the monthly bills isn't much of an issue. A lifelong Bridgeport resident, she's worked at the same Catholic school for 32 years. She plans to stay in the home at least until retirement, so there's also little chance she'll move and face early termination costs.

"I'm committed to this community," she said, recalling a childhood filled with lots of celebrations with family and friends. "It's one of the last real neighborhoods, and people value their property. People my age are inheriting property here that has soared in value. There are 25-foot lots going for $100,000."

And the consumer groups' warnings may ring truer for states like Texas and Florida that offer big homestead exemptions from bankruptcy court. In Illinois, just $7,500 can be sheltered in a bankruptcy anyway, so credit card debt can cause just as many problems for homeowners.

"There's clearly been a preference for the flexibility of home equity lines and the alarm bells [about customers' ability to handle the debt] are not going off," said Fritz Elmendorf, spokesman for the Community Bankers Association, an industry group.

In its 2001 home equity study, the association found that equity line foreclosures as a percentage of total portfolio dollars doubled last year, but still represented less than half of 1 percent.

The key, say loan experts and veteran borrowers alike, is to have a financial backup plan to avoid catastrophe.

Posnock, the landlord-to-be, has a cash cushion that would allow her to pay off her variable-interest equity line if rates start moving up fast, for example.

Most important, use the lower rates to improve your debt situation -- not worsen it.

Lake View condo owner Jodi Rosen Wine and her husband Chris Wine used a home equity line for a big down payment on an Oak Park home earlier this year.

They recently sold the condo, and will soon pay off the equity line with the proceeds from the sale. Once that is paid off, they'll have more than 50 percent of the new home's value in equity. The game plan: owning the house free and clear by the time their kids, ages 3 and 1, graduate from high school. Once again, the low rates make it possible. They locked into a 15-year mortgage at just 6 percent.

"You can pretty much borrow any amount you want if you have good credit," said Wine, an attorney. "But people can end up doing some crazy things, like financing a car over 30 years. We're using the rates to lower our debts, not raise them."

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(c) 2002, Chicago Tribune. Distributed by Knight Ridder/Tribune Business News.

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