Home equity lines of credit begin to rebound
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 number of 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 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.
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 — 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 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 increase.