The economy's problems have proven stubborn. Despite record-low interest rates and a $700 billion financial bailout, consumers and businesses face high hurdles to borrow money, foreclosures are skyrocketing, home prices are sinking and Wall Street remains on edge. Many economists predict the current quarter – in terms of lost economic growth — will be the worst of the recession. It is a vicious cycle where all the economy's problems feed on each other, perpetuating a downward economic spiral.
Many financial institutions, when faced with these cold, hard economic facts, have tried to take these lemons and make lemonade. The most popular method has been to promote home equity loans as a way to consolidate debt and lower payments. However, do banks and credit unions really want to promote loans that tap a home’s equity, when it was questionable lending policies and sloppy appraisals that got us in this mess?
The figures are still grim – even with the promise of a new stimulus package.
Unemployment. According to the latest reports, job loss rose to 598,000 in January, the highest since September 1992, and hurtled the unemployment rate to 7.6%. Our economy has lost a staggering 3.6 million jobs since the start of the recession in December 2007. Nearly 50% of this happened during the past three months. This brings our total number of unemployed workers to 11.6 million. Analysts claim up to three million more jobs will vanish in 2009.
Consumer Confidence. Our Consumer Confidence Index now stands at 37.7, the lowest in history. Experts predict consumers will continue to be pessimistic about the economy and their earnings. Our low consumer confidence has become a vicious cycle. Confidence sinks to lower and lower levels, consumers cut back on spending, and the result is more layoffs and more economic bad news.
Real Estate. Home prices, new construction and home sales will continue to decline this year, while mortgage defaults, foreclosures and unemployment will continue to rise. Experts predict the number of new homes constructed to fall by 29% this year from last year. New home sales will also fall by 14% this year. More than 2.3 million American homeowners faced foreclosure proceedings last year, up 81% from 2007. Research firms predict that number will increase another 18% in 2009.
With these doom-and-gloom statistics, a home equity loan may not be what people need to consolidate their debt. Financial institutions face an ethical dilemma: Do you look out for your customer or for your bottom line?
Look at what a home equity loan can mean for the average American.
* With today’s low interest rates, people take out home equity loans thinking they will be a quick fix for their credit woes. What they may not understand is that any kind of debt consolidation loan is a temporary relief, not a permanent cure.
* According to researchers, 70% of Americans who take out a home equity loan end up with the same, if not higher, debt load within two years.
* If borrowers have taken on so much debt that they want a home equity loan, chances are they will not qualify for the advertised low interest rates.
* Borrowing against a house involves risk: losing the home if the loan defaults.
So back to the ethical dilemma: Do you look out for your customer or for your bottom line? The answer is both. Financial institutions have a responsibility to their customers now more than any time in recent history. Those banks and credit unions that take this obligation to heart are the ones that most likely will emerge stronger on the other side.
With this approach, a financial institution should have no problems promoting home equity loans as a way for customer to consolidate debt, because these banks and credit unions will:
* Educate their customers on the increased risks they face and provide them with the tools to manage that risk.
* Find proactive ways to help their customers through these times and work with them to avoid even more financial distress.
If your customers are at the end of their rope with debt, a 10% home equity loan is the ideal way to pay off 14% credit cards or 400% payday loans. The payments will be easier to handle and less costly. In addition, the interest paid on a home equity loan may be tax deductible, while credit card debt is never tax deductible.
Promoting home equity loans as a way to consolidate debt is a valid action. While our economy is still recovering from reckless lending, the lesson is not do not lend, but please lend responsibly. A customer’s success directly affects a financial institution’s success. That is a lesson that should hold regardless of the state of our economy.
