WE'RE HEARING if you look closely, you can start to see the first shoots of a reviving home equity lending industry. Indeed, we may be on the verge of what some observers are calling a new "golden age" of home equity lending.
The last several years have seen home equity lenders—primarily commercial banks and credit unions—rein in their activities due to the plunge in home prices and high credit losses. Before the home price bubble burst, home equity lending was one of the safest, most profitable and fastest growing areas in consumer lending.
Now it looks like the market is about to rebound. According to the Federal Reserve's fourth-quarter 2012 flow of funds report, owners’ equity in residential real estate jumped 25% to $8.2 trillion from $6.6 trillion a year earlier, mainly due to rising home prices plus a small decline in mortgage debt. Owners’ equity as a percentage of total real estate jumped to 46.6%, the highest since the first quarter of 2008 and up from just 40.5% at the end of 2011.
At the same time, credit quality is starting to improve. Home equity loan delinquencies fell to 4.03% from 4.2%, according to the American Bankers Association's Consumer Credit Delinquency Bulletin, while open-end home equity lines of credit delinquencies fell to 1.85% from 1.93%.
Those two factors—rising home equity and lower delinquencies—are making lenders more comfortable in soliciting prospective loan customers again.
"We have heard anecdotally that there are some banks that are going back into the home equity market," says Keith Leggett, a senior economist at the ABA. "The environment is becoming more favorable for that type of lending. Clearly we have seen a pickup. Banks are looking for profitable lending opportunities and right now home equity may appear to be one of those markets."
Regarding specific geographic areas, Leggett mentioned California and Washington, D.C., as places where home equity lending has picked up.
Gregory B. Meyer, community relations manager at Meriwest Credit Union in San Jose, says home equity lending in the San Francisco Bay area has been "on fire" since the first of the year. "We have seen a significant increase in the number and dollar amount of equity line and loan applications. A number of local financial institutions are reporting that they are meeting their equity lending goals for the first quarter," he says.
"We could be entering a new 'golden age' of equity lending," Meyer says. "Equity in homes in the Bay Area has increased around 20% to 24% over the past year. Most areas of the country are starting to realize greater equity growth and this is sparking a resurgence in lending on equity."
The rise in owner equity—the collateral behind home equity loans—and the number of eligible home equity borrowers is being driven not just by higher home prices but by several other factors.
According to SMR Research Corp. in Hackettstown, N.J., the past several years of historically low interest rates has enabled millions of homeowners to refinance at rates so low they may never refinance again.
At the same time, more people have refinanced into 15-year mortgages, rather than traditional 30-year loans. In addition, the drop in home prices the past few years translates into smaller mortgage balances, so homeowners will be building equity much faster than ever before.
Stuart Feldstein, president of SMR, also notes that a large number of homes over the past few years have been purchased for cash, often by investors. "Each home that gets purchased for cash is 100% equity," he notes.
SMR expects home equity lending to accelerate once long-term interest rates rise, which will basically shut down first-mortgage refinances. If homeowners need to borrow, they'll choose home equity loans.
But the expected resurgence in home equity lending doesn't mean it will be a slam-dunk for borrowers to get loans like it was before the housing and mortgage bubbles burst.
"Loan underwriting standards are higher than they were prior to the recession," Meyer warns. "Typically, one will need a 740 or higher credit score to get the best interest rates. Six years ago, you only needed a 680."
In addition, lenders will be demanding full home appraisals; "drive-by" appraisals are no longer acceptable, he says. Stated-income loans are also out, even if the borrower has a lot of home equity. Lenders will require loan applicants to fully verify their incomes.
But even with these tighter underwriting standards, demand for equity loans will grow as long as the prime rate and other interest rate benchmarks remain as low as they are, Meyer says. Currently, the prime rate stands at 3.25%, with home equity lines of credit priced just slightly above that. The Fed maintains that it will hold short-term rates at their currently levels at least until the end of 2014.
George Yacik has been covering the residential mortgage business for more than 20 years and writes frequently for industry publications. He can be reached at
