Home equity lines of credit begin to make a comeback

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 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 percent to $554 billion, according to the Federal Deposit Insurance Corp.

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 mistakenly assumed residential real estate values would keep appreciating, some consumers overused the equity in their homes to buy whatever they wanted — including cars, home improvements and vacations — and supported a lifestyle their incomes could not. For many, 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 percent 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.”

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 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, Wis.-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 percent last year from 2011.

In a March report, 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 percent per year in 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.

—-

&Copy;2013 Milwaukee Journal Sentinel

Visit the Milwaukee Journal Sentinel at www.jsonline.com

Distributed by MCT Information Services

More in Herald Business Journal

Peoples, HomeStreet banks bump lowest salaries after tax cut

The banks with Snohomish County branches will raise minimum salaries for employees to $15 an hour.

Electroimpact cuts Mukilteo staff by 9 percent

“What we’re missing now is a monster anchor project,” the company’s VP said.

Exotic animals find compassionate care in Bothell (video)

At the Center for Bird and Exotic Animal Medicine, vets treat snakes, hedgehogs and even kangaroos.

How can you tell if you are getting good financial advice?

Assume that it’s still the same buyer-beware market that has always existed.

Amanda Strong (left) tries on an Angel of the Winds Arena hat as she and Courtney Brown hand out gift bags after the renaming ceremony Dec. 13 in Everett. The new name replaces the Xfinity name. (Andy Bronson / Her file)
Angel of the Winds to break ground on $60M casino expansion

“We think we’re on the cusp of becoming a major resort.”

In this Dec. 20, 2017, photo, a clerk reaches to a shelf to pick an item for a customer order at the Amazon Prime warehouse, in New York. (AP Photo/Mark Lennihan, File)
Amazon’s potential HQ2 sites leaves many cities disappointed

And yet, some municipal leaders are looking at the bright side of being rejected.

How do you retrieve an errant Boeing 737 from a muddy slope?

Turkish authorities used cranes to lift a plane that skidded off a runway.

Don’t take economic forecasts to the bank — or the casino

Air travel delays could spur a rebirth of passenger rail service.

Emirates orders 20 more Airbus A380 jumbos, saving program

The Dubai carrier also has options to buy 16 more. The program seems safe until 2029.

Most Read