A Wake-Up Call on Home Equity Loans

Certainly financial institutions should follow the law, but I don't feel sorry for those consumers whose lines of credit have been reduced or suspended.

For years, homeowners have used the increased value in their homes as a source of cash when they should have been using savings. They turned to home equity lines of credit like they were credit cards.

During the housing boom, the originations of home equity lines of credit ballooned, according to Stuart A. Feldstein, president and co-founder of SMR Research, which publishes studies on the home mortgage business, including home equity lending.

Feldstein said home equity lending peaked in the second quarter of 2005 when, on an annualized basis, people borrowed $345.6 billion against their homes. Historically, people used such equity for home improvements or to consolidate credit card debt, he said.

"When home values were increasing wildly, people were cashing out their equity one way or another," Feldstein said.

As housing prices rose, people began to lean on this line of credit too heavily. For too many people, their home's equity was just too tempting not to touch. They used this debt to pay off other debt such as a car loan. They used it to invest in a business, take vacations or pay for college expenses.

Compared to other consumer debt, the cost of a home equity line of credit does appear cheaper. And people tell themselves it's a better way to borrow because the interest paid on this debt is tax deductible.

Unfortunately, a lot of people are learning the true cost of this credit. They now know that this type of loan can be a debt trap.

· On the air: Michelle Singletary discusses personal finance Tuesdays on NPR's "Day to Day" program and athttp://www.npr.org.

· By mail: Readers can write to her at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071.

· By e-mail:singletarym@washpost.com.

Comments and questions are welcome, but because of the volume of mail, personal responses are not always possible. Please note that comments or questions may be used in a future column, with the writer's name, unless a specific request to do otherwise is indicated.