Home Equity: Drawing the Line

According to a recent New York Times article, home equity loans have ballooned to more than $1 trillion dollars from $1 billion dollars in the early 1980s. It's an unbelievable statistic given the risks that the banks currently have on their books with CDOs (Collateralized Debt Obligations) and MBSs (mortgage-backed securities) exposure due to this subprime crisis.

You may be one of the millions of Americans who have seen their home equity lines shut down or under review in the past couple of months. There is a growing wave of concern among financial institutions like Countrywide, JP Morgan Chase, Wells Fargo, Citigroup and even broker dealers like Morgan Stanley, who are worried about the next shoe to drop and how to shore up their balance sheets and minimize further risk. Cutting back on home equity lines or second mortgages whose value is tied to the value of the home, makes sense. Not good news for consumers in an already delicate market, but is it the right thing for the larger financial institutions to do? Is it hurting business? Or, is it the medicine necessary to correct an overinflated bubble where access to credit was much too easy?

This morning, I was joined by Dick Bove of Ladenburg Thalmann; Joe Reilly, Centrix Bank President and CEO, a community bank from New Hampshire; and David Weidner, the Wall Street columnist at Marketwatch, joined me to discuss the credit freeze, where we go from here and why this period for banks is not nearly as difficult as the 80s.