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Home Equity Lending That Fueled Consumer Spending to Recover

By Kathleen M. Howley, Prashant Gopal and John Gittelsohn

(Bloomberg) — John Hale's four-bedroom house near Seattle is worth about $2 million and is 90 percent paid for. It still took him nine months to find a bank that would give him a $250,000 home equity line of credit.

Rising home prices and an improving economy will spark a modest rebound this year in U.S. home equity lending, the driver of about 2 percent of consumer spending in the first half of the decade. This time around, lenders and homeowners will be more cautious about converting their equity to cash, muting any boost to the economy after the worst slump since the Great Depression, said Greg McBride, senior financial analyst with

"Home equity borrowing won't be the economic crutch it was a few years ago," McBride, based in North Palm Beach, Florida, said in an interview. "This is not an economy in which consumers are going to be able to go nuts."

As borrowers like Hale tap into the value of their properties, lenders will make about $36 billion in new home equity loans in the next 12 months, according to a forecast by Moody's in West Chester, Pennsylvania. That will increase the outstanding balances of the loans by 4.2 percent to $903.5 billion from a two-year low of $867.3 billion this quarter.

About $34 billion of home equity loans were made at the peak, in 2008, according to Moody's The difference this time around will be how the money is spent, said Frank Nothaft, chief economist of Freddie Mac, the government-run mortgage buyer based in McLean, Virginia. Borrowers are less likely now to use their home's equity for luxury purchases.

Consumer Spending

Consumers spent about $677.3 billion, or about $113 billion a year, from home equity loans on purchases such as cars or televisions during the 2000 to 2005 real estate boom, according to a 2007 paper by former Federal Reserve Chairman Alan Greenspan and Fed economist James Kennedy. Another $376.2 billion, or about $63 billion a year, went toward home renovations.

"Consumers are better managing their own personal balance sheet as a result of the difficult recession we went through," Nothaft said in an interview. "Many households had taken on too much debt and were overextended, and now people are focused on paying that off."

Any growth in equity lending during 2010 will necessarily be limited to homeowners whose properties are worth more than what they owe. More than a fifth of U.S. homes with mortgages had negative equity in the fourth quarter, according to, a Seattle-based real estate data provider.

Bank of America

Bank of America Corp., the largest U.S. lender, holds $43 billion of home equity loans in which the debt exceeds the property's value, Chief Executive Officer Brian Moynihan said yesterday at a New York investor conference. It is writing off home equity loans at about $1.5 billion to $2 billion a quarter, he said.

"The amount of people who both have equity in their home and feel like they want to borrow it out is a really limited group," said Moynihan, whose Charlotte, North Carolina-based bank has a $149 billion home-equity loan portfolio.

Chris Lafakis, an analyst at, said there likely will be "modest" growth in home equity lending in 2010.

"There is a lot of distress out there, but initial claims for unemployment insurance are coming down, most of the home price declines are behind us, and banks are pretty much done tightening their lending standards," Lafakis said.

Economic Growth

The jobless rate held at 9.7 percent in February, down from a 26-year peak of 10.1 percent in October, and employers cut fewer jobs than economists estimated in the month, the Labor Department said March 5. The U.S. economy expanded at a 5.9 percent annual rate in the fourth quarter, the biggest gain in more than six years, the Commerce Department said Feb. 26.

Property prices probably will rise this year for the first time since 2006, boosting homeowners' equity. The median U.S. home price likely will increase to $177,200 in the second quarter from $167,600 in the current period, according to the National Association of Realtors. It will climb 2.8 percent for the year, the Chicago-based trade group said.

"Lenders are always going to be looking for opportunities for home equity lending in areas where they think prices will go up," said David Berson, chief economist for PMI Group Inc., based in Walnut Creek, California.

Home Price Drop

U.S. home prices fell 13 percent last year to a median of $172,500, the largest annual drop since the 1930s, according to the National Association of Realtors. The decline followed a 9.5 percent drop in 2008, NAR said.

"The people who bought in 2006 and 2007 have seen their equity wiped out because of falling prices, but if you bought in 2003 or 2004, you probably still have enough of a stake" to qualify for a home equity loan, said's Lafakis.

Hale, the homeowner near Seattle, has seen the value of his property double since he bought it in 2000. He said he plans to use the funds from his home equity loan to renovate his living room, kitchen and bathroom. Three lenders turned him down before he was approved last month by US Bancorp of Minneapolis.

"It took far longer than I ever imagined," said Hale, 65, who owns a business development company called J Link in Issaquah, Washington. "For people in my situation — with equity — it should be a no-brainer."

To contact the reporters on this story: Kathleen M. Howley in Boston at; Prashant Gopal in New York at; John Gittelsohn in New York at

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