Home equity loans of credit make a comeback
Kathleen M. Howley | SFGate | Monday, November 26, 2012 | link
Home equity lines of credit that fueled a spending spree during the property boom are back.
After six years of declines, lending on home equity will rise 30 percent to $79.6 billion this year, the highest level since the start of the financial crisis in 2008, according to the economics research unit of Moody’s Corp. Originations next year will jump 31 percent to $104 billion, it projected.
Lending tied to real estate is reviving as record-low mortgage rates spur the housing recovery while an improving job market makes it easier for people to borrow. A rise in home equity lines is in turn helping the economy, fueling purchases of goods like televisions and refrigerators. Consumer spending, the biggest part of the economy, accelerated at a 2 percent annual rate last quarter, up from a 1.5 percent pace in the prior period.
“If house prices continue to rise, home equity lending will keep rising,” said Mustafa Akcay, a Moody’s Analytics economist in West Chester, Pa. “Lenders have been worried about the ability of consumers to pay back their loans, and as the economy improves, that concern is easing.”
The median home price will probably gain 8 percent this year, the fastest pace of growth since 2005, according to the Mortgage Bankers Association in Washington. The amount of equity homeowners had in the second quarter rose by $406 billion to $7.3 trillion, the highest level since 2007.
“People will spend more of their equity,” said Chris Christopher, an economist at IHS Global Insight in Lexington, Mass. “It won’t be as much as they spent when prices were gaining at a rapid pace in 2005 and 2006, but it should have a positive impact on consumer spending.”
The revival in home equity lines comes as lenders including Bank of America, Wells Fargo and Citigroup are still coming to grips with bad loans made during the housing boom that ended in 2006. Pressed by regulators this year, banks are writing off lines of credit wiped out by a housing decline that stripped about a third of home values in four years. Banks charged off $4.5 billion of equity loans in the third quarter, the most in two years, according to Federal Reserve data.
Americans had used their homes like credit cards to go on spending sprees during the real estate boom, from 2000 to mid-2006, tapping their equity to buy cars, televisions and luxury cruises. Homeowners spent used about $677.3 billion, about $113 billion a year, from home equity loans, according to a 2007 paper by former Federal Reserve Chairman Alan Greenspan and Fed economist James Kennedy.
Lines of credit are adjustable-rate mortgages tied to prime rates, the interest charged by banks to their most creditworthy customers, with the addition of a margin determined by the lender. The national average prime rate has been 3.25 percent since the end of 2008. Typically, banks add two to four percentage points onto that.
The economy probably will grow at a 2.2 percent pace in 2012, the third year after the end of the recession, according to 80 economists surveyed by Bloomberg. Unemployment probably will average 8.1 percent, down from 9 percent last year, according to the economists’ average estimate.
The biggest use of home-equity loans is to pay for home renovations and repairs, at 54 percent, according to the Commerce Department. Renovation spending this year probably will rise to $120.7 billion from $114 billion in 2011, according to Harvard University’s Joint Center for Housing Studies.
Typically, the margins banks add to the prime rate might start at around two percentage points, what banks would call prime plus 2. Borrowers are approved for an amount they can use in full or just tap when they need, often drawing on the money with credit cards or checks. Rates for the loans vary with location and credit scores.
San Francisco’s Wells Fargo is offering a prime-plus-2 line of credit with a $10,000 minimum in Philadelphia, according to Bankrate.com, an interest rate aggregator. In San Diego, the same loan was prime plus 2.6.
Bank of America had a prime plus 3.9 loan with a minimum of $25,000 in White Plains, N.Y. The bank offered a prime-plus-3.7 line in Portland, Ore. All of the loans require at least a 700 credit score and at least 20 percent equity.
During the housing boom, lenders often would approve lines of credit that exceeded home values. One popular type was a 1-2-5 loan that allowed the main mortgage combined with the home equity loan to total 125 percent of a home’s value.
Home equity lenders and borrowers this time will be more discerning, said Anika Khan, an economist in Charlotte, N.C., at Wells Fargo Securities, a unit of Wells Fargo.
“The memory of the housing boom and the correction will make folks a lot more conservative,” Khan said. “That means only getting the amount of loan they absolutely need, and spending it in a more sensible way.”