HOME EQUITY
Borrowing against home can be risky
MIAMI -- Dec. 13, 2004 -- The National Association of Securities Dealers (NASD) is investigating whether brokers are pushing their clients to borrow against their homes in order to buy stocks and bonds.



Home values are soaring, especially in South Florida where Miami-Dade''s median home price is up 23 percent from last year and Fort Lauderdale''s is up 23.5 percent. The temptation is great to tap some of that wealth.



A Federal Reserve Board study found that people who refinance their mortgages were using 11 percent of that money -- more than $24,000 on average -- to invest.



But tapping home equity to invest "poses significant and unique risks and failure to understand those risks could cost investors their biggest asset -- their home," NASD Vice Chairman Mary Schapiro said.



"You''re not going to borrow against your house if you want to invest with me," said Denise Johnson-Stephens, a certified financial planner at Princeton Financial Services in Miami. "Clients of mine have asked about it, and I''ve told them that''s something I do not want to be involved in at all."



NASD last week raised the issue for the third time this year. Schapiro said several enforcement actions will be announced soon, as well.



For now, the self-regulatory organization says brokers must document whether their clients can afford to take out home equity loans and whether their ability to repay their debts hinges on the investments they''re buying.



"It really goes toward understanding whether an investor will be able to maintain their mortgage," Schapiro said.



If they can''t, the consequences can be disastrous.



Earlier this year, NASD took enforcement actions against three brokers, including one from First Union (now Wachovia). The brokers'' clients owned a home in Vail, Colo., worth $800,000. The broker convinced them to borrow $400,000 on their home equity and that they put the money into a variable annuity. Two years later, the annuity was worth only $184,187.



Eventually, Wachovia settled with the couple for $260,707.



Investors may fail to recognize the conflict of interests in such a strategy, NASD said. The broker makes a commission on the investments he sells. And often, the mortgage may be sold by the brokerage, too, as it was in the First Union case.



It''s easy to see why people would think of home equity as money they can easily spend. Loans are widely available. They can be had for little or no fees. And they are widely marketed as the solution to anyone''s cash needs -- for credit card payments, tuition, retirement.



Easy access might lead some to borrow freely and to overlook the basic fact that when you take out a home equity loan, you are adding to your debts.



If a homeowner uses that money for investments, he''s adding to his risk, as well.



While Schapiro wouldn''t say this is always a bad idea, it''s clearly an edgy one.



Because, if the homeowner is counting on income from investments to cover the mortgage and home equity loan payments, he could easily get into trouble if the investments don''t perform as he expects.



That''s exactly what would have happened to someone who took out a $50,000 home equity line of credit a year ago, when the average interest rate was about 3 percent. If the person put that money in the Dow Jones Industrial Average stocks, his investments would be up just 0.85 percent.



A great stock picker might do better. But there are no sure bets. Even in the Standard & Poor''s 500, 156 of those stocks have lost money through last Thursday.