The home equity loan market in U.S. is colossal. According to one estimate, American house owners currently have over $8 trillion in mortgage liability. To tap this growing market the lenders offer different options like deferred interest loans, long term and short-term advances, no document loans, 100% or more of the property value as loans, and so on. As a result of this, two-thirds of U.S. families own their homes. The bubble keeps expanding. If it bursts, many lenders and borrowers could be badly hit.

National banks and local banks, mortgage companies, credit unions, and thrifts cater to the home equity loan market. Brokers who work on commission generate about fifty per cent of the business; higher the benefit to the lender, the more the money made by the middleman. The licensing regulations for them are not very stringent. There is also a class known as 'correspondents'. They tie-up business and sell it to other lenders and gain more by closing as many loans as possible. Some companies specialize in sub prime loans meant mainly for people with poor credit rating; here the interest rates are higher than in the case of prime loans.

Several lending institutions end up with high-risk loans. There is also an extent of predatory lending. In this segment prudent parameters like credit rating, equity (net worth of the property on which the loan is charged), and repayment capacity are not really considered. Many borrowers fall into the trap. Usually, the people who swallow the bait are those who believe or are led to believe that they cannot obtain regular home equity loans in the normal course. They are probably not aware of the ways and means to find out the real position.

Banking regulators of the Federal government have issued warnings about this snare. Basically, it is a question of educating the potential borrowers and bringing better discipline among lenders. It is not an easy job. No doubt, the growth of housing in U.S. owes a great deal to home equity loan companies. But be wary of the loan sharks.

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