Home-equity lines of credit, once a staple of home finance, have been fading from view, and not only because securing credit is generally...
Home-equity lines of credit, once a staple of home finance, have been fading from view, and not only because securing credit is generally more difficult. As borrowers also grow more fiscally conservative, industry experts say, many are becoming reluctant to take on these second mortgages.
HELOCs, as they’re known in the industry, are typically open-ended revolving credit products, with interest rates pegged to the prime lending rate, which banks offer their best customers.
In recent years, when the real-estate market was strong, many homeowners used HELOCs to draw cash from their homes. At its peak, in November 2008, 13.3 percent of residential loans were home-equity loans and HELOCs, according to Mortgagebot, a Mequon, Wis., company that tracks mortgage activity.
But in April 2009, home-equity lending dropped to 3.2 percent of the overall market. It rebounded slightly in November, the last month for which Mortgagebot data was available, to 5 percent.
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Other sources suggest an even bleaker recent picture. First American CoreLogic, a mortgage industry statistical and consulting firm that tracks a wider range of lenders than Mortgagebot, said that in November 2009, HELOC originations slid to $3.8 billion, the lowest level in the last two years and far below October’s $6.6 billion.
Mark Fleming, the chief economist at First American, says that even though home prices have stabilized, fewer people have enough equity in their homes to qualify for a line of credit. He added, “Consumers are still retrenching and paying down debt, not extending debt burdens.”
Some mortgage-industry executives say they also see continued reluctance from the nation’s biggest banks to offer HELOCs, even to those with substantial equity in their homes. Regional banks, however, may be more willing to offer HELOCs, because they typically suffered fewer losses during the subprime-mortgage collapse.
TD Bank, which is based in Cherry Hill, N.J., and Portland, Maine, increased its HELOC lending in 2009, according to Gregory Braca, the bank’s regional president in New York. The institution’s overall lending activity grew by 10 percent over 2008, and home-equity lending “drove that growth,” Braca said.
TD Bank offers one of the more competitive HELOC rates. The most highly qualified applicants — specifically, those with credit scores of more than 680, low household debt and good income, and who take out credit lines of $100,000 or more — would qualify for an interest rate of half a percentage point over the prime rate, which is currently at 3.25 percent. (In recent years, lenders had offered the lines for half a percentage point below prime.)
Braca said he had seen some signals from other lenders that they, too, may grow more aggressive in marketing HELOCs. In part, he said, lenders may be reacting to the stabilization in housing prices. “But there’s also a lot of pressure on banks, from Washington and elsewhere, to start lending again,” he added.
Wayne Walker, the senior vice president for residential lending at People’s United Bank, a regional bank based in Bridgeport, Conn., said that his institution had not dropped interest rates or loosened lending requirements on HELOCs, but that it could in the coming months.
“From a lender’s perspective,” Walker said, “that we have more stable home prices is certainly reassuring.”
In late 2008, People’s United raised the minimum interest rate for HELOCs from 3 percent to 4 percent, where it remains. It increased to 25 percent from 20 percent the amount of home equity borrowers are required to retain. And borrowers whose combined monthly debts exceeded 40 percent of gross income could not qualify; in previous years that percentage limit was 45.
But Walker predicted that in the industry in general, “you should start to see lending guidelines loosen up a little bit from where they are now.”