The National Association of Securities Dealers is examining whether U.S. brokers are inappropriately recommending that some clients use home-equity loans to increase investments in the stock market.
"Turning equity into cash to make financial investments isn't an appropriate strategy for many investors," said Mary Schapiro, vice chairwoman of the Washington-based regulator, in a statement released last week. "That strategy poses significant and unique risks, and failure to understand those risks could cost them their biggest asset - their home."
More homeowners than ever before are tapping into their increased home equity to purchase securities, Schapiro said. A study from the Federal Reserve found that 11 percent of the funds from mortgage refinancings were used for stock market and other financial investments in the 18 months ended June 2002, up from less than 2 percent three years earlier.
Brokers should check on whether their clients are increasing their mortgage to make risky investments or putting too high a proportion of the value of their home into the markets, the agency said in the statement.
It is the third time this year that the agency has raised the issue of using home equity to buy securities. Brokerages should disclose any potential conflicts of interest such as commissions or fees they may make on investments resulting from mortgage refinancings, the organization said.
It is a violation for brokers to recommend the purchase of securities when the customer can't afford the financial commitment, the group said.