Home equity lines of credit, which soared in popularity during the housing boom but faded as residential real estate values crashed, are starting to make a comeback.
The growing revival in consumers taking out loans secured by their homes is being driven by several factors, but chief among them is that home prices finally have stabilized in the slowly improving economy, bankers and analysts said.
"It's clearly a reflection of the economy," said Thomas R. Homberg, leader of the financial institutions practice group at the Milwaukee law firm Godfrey & Kahn. "Housing has rebounded and you see consumers out there buying things."
Nationally, home equity lines of credit by banks peaked at $668 billion in 2008, just as the recession was about to dig in and an overheated housing market was beginning its collapse. By 2012, they had decreased by 17% to $554 billion, according to the Federal Deposit Insurance Corp.
At Wisconsin-based banks, home equity lines of credit totaled $3.2 billion in 2012, down about 11% from $3.6 billion in 2011.
But some banks are advertising home equity lines of credit again, often with low introductory interest rates. Home equity lines of credit are revolving lines of credit in which the borrower's house serves as collateral. The interest rate normally is variable, tied to an index.
Banks and credit unions also offer traditional second mortgages, which provide a fixed amount of money that is repaid over a fixed period of time.
During the housing bubble, when many lenders and investors mistak enly assumed residential real estate values would keep appreciating, some consumers overused the equity in their homes to buy whatever they wanted - from cars to home improvements to vacations - and supported a lifestyle their incomes could not. It ended in financial hardship, if not ruin.
Lending standards have tightened since then, said Greg McBride, a financial analyst with Bankrate.com
"The home equity loans and lines of credit that lenders are looking to issue now require the borrower to retain typically a 20% equity stake, so there's a sufficient margin of safety there," McBride said. "It's much different from the go-go days of the housing boom when borrowers were borrowing against the last nickel of equity in the house."
Scarcity of borrowers
Although financial institutions have been criticized by politicians for not doing enough lending since the recession, the problem for banks has been finding qualified borrowers who are reasonably certain to pay the money back, McBride said. As the economy improves and people and businesses become more confident in their financial position, borrowing should grow.
"Banks are in business to loan money," McBride said. "This nonsense that banks don't want to make loans is like saying McDonald's doesn't want to sell hamburgers."
Michael T. Crowley Jr., whose Bank Mutual bank has been advertising a low introductory rate on home equity lines of credit, said banks have money to lend. But construction loans and business lending - important money makers for many banks - still are slow, he said.
"What it reflects is that banks are looking for outlets to be able to lend money," Crowley, who is chairman and chief executive of Brown Deer-based Bank Mutual Corp., said of the renewed emphasis on home equity lending. "Businesses are kind of holding back a little bit. So I think you see these home equity loans with teaser rates in an attempt to get some money out in a relatively safe fashion."
Crowley said consumer lending at Bank Mutual, which consist mostly of home equity loans, was up about 20% last year from 2011.
A return to normal
PyraMax Bank of Greenfield also has been offering a low introductory rate for home equity lines of credit.
"We've been doing an awful lot of re-fis on first mortgages, and the values have really started to firm up and actually started to appreciate, so people have a little more equity in their house," said Richard Hurd, president and CEO of PyraMax.
In a report this month, real estate price forecaster Fiserv Case-Shiller said trends point to a return to a normal housing market, with prices projected to grow 3.3% per year over the next five years in the United States.
McBride said he thinks some of the homeowners borrowing against home equity today don't necessarily need the money. It's just too inexpensive to pass up, he said.
"A lot of people that are taking out these home equity loans can be pretty well-to-do borrowers," McBride said. "They are not doing it to support their lifestyle or anything like that. They're taking advantage of the cheap cost of it and using that money for other investments."
People considering a loan tied to their home equity might want to do it this year, said Rose Oswald Poels, chief executive of the Wisconsin Bankers Association. New regulatory rules being considered for banks in 2014 could make it more difficult to offer home equity loans or too pricey for consumers to afford them, she said.
"This is a good time to really start looking at it," she said.
by Paul Gores