Now that housing prices for homes in Southern California are rising after the calamitous plummeting in the wake of the financial crisis five years ago, a new report indicates that lenders are starting to return to some of the dangerous practices which led to that crisis. According to Data Quick, homeowners in the six-county Southern California region took out 47,542 home equity lines of credit last year — 48% more than in 2012, according to the research firm. Apparently, procuring second mortgages on one’s home is getting easier as it did before the bottom fell out of the housing market.
Furthermore, cash-out loans relying on the equity in the home of the borrower as collateral, are themselves making a comeback, according to executives at Quicken Loans and Bank of the West. However, these extensions of lines of credit are being subject to greater scrutiny and regulation than was the case before the financial crisis occurred, claims these executives.
A different type of recurrence to questionable pre-crisis practices is taking place among hedge funds. Several large banks are again lending money to these funds to buy collateralized debt obligations, bonds typically backed by pools of low-rated corporate loans. These packaged instruments, intended to spread risk, actually played a dangerous role in fueling the financial crisis by acting as a mechanism to unfortunately ensure that losses caused by the collapse in housing prices affected numerous financial institutions. When the return on these investments is strong, the profitability can be very high. But when the housing market as a whole tanks, the losses can be quite severe.
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