Borrowing Against The House, Once Again

Here is another sign of economic recovery: Home equity lending is seeing a revival.

According to the Equifax March National Consumer Credit Trends Report, for home equity lines of credit, new credit originated in January 2013 totaled $6.2 billion, which was an increase of 20% compared to the $5.1 billion in January 2012. It was the strongest start to a calendar year since 2009.

‘Lending is back, and it appears to be solid,’ says Brian Skarda, senior vice president of residential mortgage and consumer lending for Union Savings Bank in Danbury, Conn.
‘Folks who can borrow are borrowing.’

One reason why homeowners can borrow is that their homes are regaining some of the value lost during the crisis. According to the S&P/Case-Shiller Home Price Indices, average home prices increased 9.3% for the 20-City Composite in the 12 months ending in February 2013. The 20-City Composite rose 0.3% from January to February. In February 2013, average home prices were back to their autumn 2003 levels.
Many industry experts remember 2003. That was around the time that the expression, ‘using the home as an ATM,’ was becoming popular. Banks offered home equity loans and lines of credit of 125% loan to value, and borrowers were using the funds to splurge for vacations and large screen TVs, for example.

‘The banks were issuing credit cards tied to lines of credit,’ remembers Bob Dorsa, president of the American Credit Union Mortgage Association in Las Vegas. ‘People were using them to go out to dinner.’

Other consumers were using the loans or lines to buy a second home or a car. ‘Obviously, you cannot demand or mandate the consumer to do anything with the money,’ Dorsa says.

Those spending sprees are not likely to happen now, Skarda says. Union Savings Bank does not ask borrowers what they plan to do with the money, but he believes they are using it for home improvements, college tuition or to pay for elder care. Instead of the senior parent taking out a reverse mortgage, some baby boomers are taking out home equity loans or lines of credit.
Skarda points out that many lenders are limiting the amount of money the consumer can borrow, and some consumers are keeping their borrowing down to a minimum. Union Savings Bank caps the LTV at 80%, and many borrowers borrow only 50% of their home's value. Some borrow as little as 20% or 30%, he says.

Spencer P. Scarboro, senior vice president of loan originations for State Employees' Credit Union (SECU) in Raleigh, N.C., agrees that the home equity business has changed.

‘Most lenders have taken a more guarded stance with home equity loans than was the case prior to the housing collapse, when it was not unusual for lenders to advertise home equity loans at loan to value levels that exceeded 100 percent,’ he says. ‘SECU will not loan more than 90 percent of the value of the home with our home equity loan program, and there are other lenders that are limiting LTV to 80 percent or less.’
Delinquencies are down, too. And according to Equifax, writeoffs in home equity revolving lines declined 44.1% in March 2013, compared to March 2012. Home equity installment loan writeoffs declined 32.9%. In a press release, Equifax noted that, overall, home finance balances declined during that time period, partly due to consumers' paying down balances when refinancing.

Some borrowers are using the home equity loan to pay the first mortgage. ‘We do expect that home equity loans will increase in popularity and availability as housing values return,’ Scarboro says. ‘Consumers who need to borrow against their homes will likely choose not to refinance their first mortgages because they have already refinanced to the low rates that have been available over the last couple of years.’

The Federal Reserve Board, in its January 2013 Senior Loan Officer Opinion Survey on Bank Lending Practices, surveyed 68 domestic banks and 22 U.S. branches and agencies of foreign banks. Among the findings: When asked for an outlook for revolving home equity lines of credit, 64.6% of respondents indicated that loan quality is likely to stabilize around current levels, and 30.8% said loan quality is likely to improve somewhat.

Dorsa points out that credit unions generally did not suffer losses at the same scale that banks did, but still, everyone is proceeding with caution.

‘From lenders' points of view, after we watched what just happened, we are still concerned it will happen again,’ he says, noting that home equity loans, which were once called second mortgages, might even be renamed again.

‘There will be lending based on the equity in one's home, but I think there will be an updated, new and improved term.’

Nora Caley is a Denver-based freelance writer.


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