Home Equity Loans Make Comeback Fueling U.S. Spending
Home equity lines of credit that fueled a spending spree during the U.S. property boom are back.
After six years of declines, lending for so-called Helocs will rise 30 percent to $79.6 billion in 2012, the highest level since the start of the financial crisis in 2008, according to the economics research unit of Moody’s Corp. Originations next year will jump another 31 percent to $104 billion, it projected.
Lending tied to real estate is reviving as record-low mortgage rates spur the housing recovery while an improving job market makes it easier for people to borrow. A rise in home equity lines is in turn helping the economy, fueling purchase of goods like televisions and refrigerators. Consumer spending, the biggest part of the economy, accelerated to a 2 percent annual rate last quarter from a 1.5 percent pace in the prior period.
“If house prices continue to rise, home equity lending will keep rising,” said Mustafa Akcay, a Moody’s Analytics economist in West Chester, Pennsylvania. “Lenders have been worried about the ability of consumers to pay back their loans, and as the economy improves, that concern is easing.”
The median U.S. home price will probably gain 8 percent this year, the fastest pace of growth since 2005, according to the Mortgage Bankers Association in Washington. The amount of equity homeowners had in the second quarter rose by $406 billion to $7.3 trillion, the highest level since 2007.
“People will spend more of their equity,” said Chris Christopher, an economist at IHS Global Insight in Lexington, Massachusetts. “It won’t be as much as they spent when prices were gaining at a rapid pace in 2005 and 2006, but it should have a positive impact on consumer spending.”
The revival in Helocs comes as lenders including Bank of America Corp. (BAC), Wells Fargo & Co. (WFC) and Citigroup Inc. (C) are still coming to grips with bad loans made during the housing boom that ended in 2006. Pressed by regulators earlier this year, banks are writing off vintage Helocs wiped out by a housing retreat that stripped about a third of home values in four years. Banks charged off -- or declared worthless -- $4.5 billion of equity loans in the third quarter, the most in two years, according to Federal Reserve data.
Americans had used their homes like credit cards to go on spending sprees during the 2000 to mid-2006 real estate boom, tapping their equity to buy cars, televisions and luxury cruises. Consumers used about $677.3 billion, or about $113 billion a year, from home equity loans for consumer spending, according to a 2007 paper by former Federal Reserve Chairman Alan Greenspan and Fed economist James Kennedy.
Helocs are adjustable-rate mortgages tied to prime rates, the interest charged by banks to their most creditworthy customers, with the addition of a margin pre-determined by the lender. The national average prime rate has been 3.25 percent since the end of 2008, as measured by Bloomberg. Typically, banks add 2 to 4 percentage points onto that.
The economy probably will grow at a 2.2 percent pace in 2012, the third year after the end of the recession, according to the median forecast of 80 economists surveyed by Bloomberg. Unemployment probably will average 8.1 percent, down from 9 percent last year, according to the economists’ average estimate.
The biggest use of Helocs is to pay for home renovations and repairs, at 54 percent, according to data released last month by the Commerce Department. Renovation spending this year probably will rise to $120.7 billion from $114 billion in 2011, according to Harvard University’s Joint Center for Housing Studies in Cambridge, Massachusetts.
Shares of Home Depot Inc. (HD), the largest U.S. home- improvement retailer, have jumped 54 percent this year as profits gained. The Atlanta-based company this month reported third quarter net income climbed 1.4 percent to $947 million, from a year earlier. Lowe’s Cos., the second-biggest, also reported third-quarter profits that topped analyst estimates on gains from purchases in advance of superstorm Sandy that hit the east coast.
Household purchases, which account for about 70 percent of gross domestic product, picked up at the end of the third quarter. Spending rose 0.8 percent, the most since February, after advancing 0.5 percent in August, an Oct. 29 Commerce Department report showed in Washington. The median estimate in a Bloomberg survey of 71 economists called for a 0.6 percent gain.
Shoppers also turned out in bigger numbers and boosted purchasing over the Black Friday weekend, according to the National Retail Federation.
Customers spent $423 on average, a 6.3 percent increase from $398 last year, Washington-based NRF said in an e-mailed statement. Starting Thanksgiving Day, 89 million Americans visited stores and websites, up from 86 million a year earlier, for total spending of $59.1 billion.
Typically, the margins banks add to the prime rate might start at around 2 percentage points, what banks would call prime plus 2. Borrowers are approved for an amount they can use in full or just tap when they need, often drawing on Helocs with credit cards or checks. Rates for Helocs vary with location and credit scores.
Wells Fargo, the largest U.S. lender, is offering a prime plus 2 Heloc with a $10,000 minimum in Philadelphia, according to Bankrate.com, an interest rate aggregator. In San Diego, the same loan was prime plus 2.6.
Bank of America, the No. 2 lender, had a prime plus 3.9 Heloc with a minimum of $25,000 in White Plains, New York. The Charlotte, North Carolina-based bank offered a prime plus 3.7 Heloc in Portland, Oregon. All of the loans required at least a 700 credit score and at least 20 percent equity.
“Having been chastened by the downturn, lenders are wary,” said Keith Gumbinger, vice president of HSH.com, a mortgage-data firm in Riverdale, New Jersey. “If a home goes underwater and the owner stops paying a Heloc, that lender may get nothing back because the collateral is gone.”
During the housing boom, lenders often would approve lines of credit that exceeded home values. One popular type of Heloc was a 1-2-5 loan that allowed the main mortgage combined with the home equity loan to total 125 percent of a home’s value.
Home-equity lenders and borrowers this time will be more discerning, said Anika Khan, an economist in Charlotte, North Carolina, at Wells Fargo Securities LLC, a unit of San Francisco-based Wells Fargo.
“The memory of the housing boom and the correction will make folks a lot more conservative,” Khan said. “That means only getting the amount of loan they absolutely need, and spending it in a more sensible way.”
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