S&Ls; Warned on Mortgages

Federal regulators issued a warning to savings and loans Thursday about the risks of a popular new type of home equity loan that, unlike traditional ones, lets consumers borrow more than their home’s value.

Savings and loans that fail to control the risks could face government action, the Office of Thrift Supervision cautioned in a seven-page bulletin to about 1,200 S&Ls; nationwide.

Thrifts, banks and consumer finance companies have been in a heated competition over the last two years or so for the new loans, which are marketed primarily as a way for consumers to consolidate their debts. The loans break the rules of traditional financing by letting homeowners borrow as much as 125% of their home’s value.

With such loans, borrowers shift mounting credit card debts, car loans and other bills into a single mortgage payment that carries a lower interest rate, although it is higher than that on traditional home equity loans. Monthly expenses are reduced while debts are repaid more quickly. The interest is tax-deductible.

Critics contend the loans are risky gimmicks that create a class of permanent debtors who spend years paying down their debt just to regain positive home equity.