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The house that was your ATM is back

November 27, 2013: 11:19 AM ET

Banks are increasing their home equity lines of credit business, but such loans made during the housing heyday could still haunt them.

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FORTUNE -- During the U.S. housing market's boom years, borrowers treated their homes like an endless pot of money for vacations and other luxuries. Banks eagerly approved home equity lines of credit, known as HELOCs, as homeowners looked to cash in on soaring property values.

It seemed like a sweet deal until 2007, when the housing market crashed. Banks lost billions. So did borrowers. Many saddled with debt either foreclosed or struggled to pay down mortgages worth more than their property.

HELOCs virtually dried up during the darkest days of the Great Recession, but they've been making a comeback as property prices rebound in big ways. Bloomberg reported the rebound earlier this week, but it's worth reading the piece in tandem with a report by Reuters, which suggests banks may have to deal with another mortgage mess coming from HELOCs approved during the last housing boom. If the problems turn out to be serious, the return of treating your home like an ATM once again may be short-lived.

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HELOCs grew by 11% to a total of $78.6 billion in 2012. This year, they're on pace to grow by 16% to $90.9 billion, according to Mustafa Akcay, a Moody's Analytics economist. This time around, banks have become relatively more conservative. No more fancy cars and vacays -- HELOCs are instead driving home renovations that would likely raise property values. For evidence, just take a look at the latest earnings from home improvement specialty retailers Home Depot (HD) and Lowes (LOW).

In 2014, HELOCs are expected to reach a five-year high, Akcay forecasts. It's unlikely, however, such loans will return to their pre-recession peak of $310 billion any time soon. Ackay points to anticipated increases in interest rates, as the Federal Reserve is expected to scale down its bond-buying program any month now. That would make it pricier for borrowers to take out additional lines of credit. There's also the chance that banks may have have less to lend out in the coming years, as financial institutions anticipate new federal rules requiring them to hold more capital to cushion against big losses.

And while JPMorgan Chase (JPM) last week agreed to a $13 billion settlement with the U.S. government, the bank and others on Wall Street aren't finished dealing with mortgage fallout. Increasingly, U.S. borrowers are missing payments on HELOCs they took out during the housing bubble -- a problem that could get worse over the next several years.

That's because more and more HELOCs made during the market boom are approaching their 10-year anniversary, at which point borrowers typically must begin to pay down the principal on their loans. And that means monthly payments could triple for borrowers who have been paying minimum interest payments. Payment obligations could rise even more if the Fed hikes interest rates as HELOCs usually carry variable interest rates.

As Reuters reported, missed payments for home equity lines of credit made in 2003 are already on the rise. Borrowers are currently delinquent on about 5.6% of loans that hit their 10-year mark, and credit bureau Equifax estimates that portion could rise to around 6% this year. That's a significant leap; delinquencies for loans from 2004 were close to 3%.

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To be sure, while new home equity loans have grown, outstanding balances on such loans overall have declined in recent years. Balances fell to $517 billion during the third quarter this year, from $567 billion a year earlier, and $608 billion during the same quarter in 2011, according to Bankregdata.com, which collected the information from the Federal Deposit Insurance Corporation.

Nevertheless, in the coming months, it's worth keeping an eye on which banks hold the highest amounts of home equity loans. As of the third quarter, they are Bank of America (BAC) with $81.4 billion, followed by Wells Fargo (WFC) with $79.8 billion. JPMorgan has $70.1 billion, Citigroup (C) is holding $22.4 billion, and PNC Bank (PNC) has $22.1 billion.

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About This Author
Nin-Hai Tseng
Nin-Hai Tseng
Writer, Fortune

Nin-Hai Tseng covers economics and finance. Before joining Fortune, Tseng was a reporter at The Orlando Sentinel and a public affairs associate at GE. She holds an MPA from Columbia University and a BS in Journalism from the University of Florida. She lives in New York City.

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