For six years starting in 2006, home-equity lines of credit were in decline. Now the loans, which allowed Americans to use their homes like credit cards as they spent freely on luxury cruises, cars, and television sets, are back. 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 Moody’s Analytics, which projects the total will jump an additional 31 percent, to $104 billion, in 2013. “If house prices continue to rise, home-equity lending will keep rising,” says Mustafa Akcay, a Moody’s economist. “Lenders have been worried about the ability of consumers to pay back their loans, and as the economy improves, that concern is easing.”
Rising house prices mean people have more equity to borrow against. The median U.S. home price probably will rise 8 percent this year, the fastest pace of growth since 2005, according to the Mortgage Bankers Association. Home equity in the second quarter rose by $406 billion to $7.3 trillion, the highest since 2007. “People will spend more of their equity,” says Chris Christopher, an economist at IHS Global Insight. “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, Wells Fargo, and Citigroup are still grappling with bad loans made during the housing boom. Pressed by regulators earlier this year, 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.
From 2000 to mid-2006, 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. Lenders would often approve lines of credit that exceeded home values. One popular type of Heloc was a 1-2-5 loan, which allowed the main mortgage combined with the home-equity loan to total 125 percent of a house’s value. Home-equity lenders and borrowers this time will be more discerning, says Anika Khan, an economist at Wells Fargo Securities. “The memory of the housing boom and the correction will make folks a lot more conservative,” Khan says. “That means only getting the amount of loan they absolutely need and spending it in a more sensible way.”