Even though homeowners’ equity positions have climbed to the highest level in four years, home equity lending contracted by an annualized $90 billion in the third quarter, or roughly the same pace that has prevailed since portfolios began deflating in earnest in 2009.
At 45% of the market value of homes at Sept. 30, the most recent date available from the Federal Reserve, owners' equity has come a long way from a low of 37% in the first quarter of 2009. But the ratio still remains well below the level of around 60% that prevailed during most of the last decade when a surge in mortgage borrowing helped create a bubble in home prices.
From the fourth quarter of 2003 to the fourth quarter of 2004, home equity loans grew at an annualized pace of $102 billion to $222 billion, after adjusting for seasonal factors.
Home equity loans at banks only peaked in the fourth quarter of 2008, or more than a year after nationwide home equity loans peaked, perhaps reflecting a move by squeezed households to tap credit lines where they could during the severest phase of the recession.
Since then, the contraction has been relentless, both at banks, which have historically held the vast majority of the market, and at nonbanks. Unused credit lines extended by banks have also continued to shrink rapidly, though not at the breakneck speed that prevailed through the recession and its immediate aftermath.
At each of the Big Four banks, the trends have been similar. They entered the recession with about 45% of nationwide home equity loans, and their share leapt to about 75% by the end of 2008 as a result of a series of acquisitions. (Bank of America bought Countrywide Financial, Wells Fargo bought Wachovia and JPMorgan Chase bought the banking operations of Washington Mutual. Citigroup’s share of home equity lines of credit is small compared to the rest of the group, but it pushed hard into closed-end junior liens in the middle of the last decade.)
The Big Four have been pulling back a little more than the banking industry as a whole—their share of loans has dropped a bit in recent years. Overall, however, it appears that billions of dollars of additional loan chargeoffs lay ahead, and there isn’t that much home equity to borrow against.