What 100% LTV Home Equity Loans Have in Common with Payday Loans

Bill Vogeney
April 9, 2010 | COMMENTS

I know what you're thinking; you're thinking “what has this guy been smoking lately? What could these POSSIBLY have in common?” Humor me as I give you some food for thought.

First of all, there probably aren't a lot of you who are making 100% home equity loans right now. Thanks to the carnage caused first by the meltdown of the sub-prime mortgage market, then a loss of millions of jobs in the US, home equity loans aren't exactly the centerpiece of our lending strategy.

Payday loans are looked at like the spawn of Satan. Pure evil. With an APR of 300% or more, abusive practices, and lending to people who live paycheck to paycheck, very few of us have anything positive to say about Payday loans. Yet there are credit unions that make these loans, albeit at lower costs and fees.

The rationale for being in the Payday lending business is something like this: “if we don't make the loans, our members will go elsewhere and pay too much.” That argument makes a lot of sense. The counterpoint is that Payday loans, regardless of the cost, are a crutch. Credit Unions potentially could better serve their members by focusing on financial education to the people most likely to need a Payday loan.

As I think back to my early years in the lending business, 100% LTV home equity loans weren't that commonplace. Homes increased in value at a more leisurely pace, so 80% to 90% LTV percent loans were more prevalent. When I stop reminiscing and contemplate today's challenges, I wonder when 100% LTV loans will make a roaring comeback?

They won't be making a roaring comeback at my shop-ever. While I wouldn't categorize these 100% LTV loans as pure evil like Payday loans, I also wonder how many loans we made to members for vacations and credit card consolidations. A vacation that might have hindered the family from selling their home. A credit card consolidation that allowed the member to go right back and pile on more debt. The sheer amount of debt that consumers owe on their homes has made it difficult for some to move for a job change. Other borrowers haven't had that financial cushion to call upon when they've faced some other financial challenge.

If you believe like I do that home price appreciation will return to lower, more historical levels, and that resumption of sound lending guidelines will prevent much of the rampant speculation in real estate experienced between 2002 and 2007, you should also believe that 100% LTV home equity loans are a thing of the past. Not because there's too much credit risk, but because it's sound financial advice. Credit Unions are and should continue to be the “White Knights” of the financial industry. If you believe that Payday loans are a bad idea for consumers, you probably should re-think the decision to allow your members to borrow every possible penny against their home.

Bill Vogeney is Secretary/Treasurer of the CUNA Lending Council and Senior VP/Chief Lending Officer at Ent FCU in Colorado Springs, CO.