Banks embrace riskier loans for homeowners, hedge funds alike

Banks are reviving some of the riskier lending practices that preceded the financial crisis, attracting attention as you might expect, although they say they’re keeping a lid on things this time.

One trend is enabling homeowners to tap equity building up as property values rise. A recent Times story looked at the increasing numbers of home-equity lines of credit as a means to accomplish this.

Another method is cash-out refinancings, which turned many homes into ATMs during the boom with unhappy results.

A Kenneth Harney column Sunday in The Times, quoting executives at Quicken Loans and Bank of the West, looked at how cash-outs are back in vogue, “under much tighter controls by lenders and used for saner purposes.�

Then there’s the report on how RBC Capital Markets, Société Générale, Wells Fargo & Co. and other banks are allowing hedge funds to borrow money in order to buy collateralized loan obligations -- bonds typically backed by pools of low-rated corporate loans.

These CLOs were among the complex securities “that helped fuel the debt boom ahead of the financial crisis,� as the Wall Street Journal noted in a story on Monday.

Borrowing to invest in them -- an example of what financiers call leverage -- can increase profit when the securities pay off. It also can multiply losses if they do not, of course.

“People learned from the crisis that the availability of leverage shouldn’t be the driving factor in an investment decision,� one specialist in trading risk said.

Let us hope so.