Equity Products Dominate Consumer Lending

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Of the $5.7 billion in average outstanding consumer loans for the 32 commercial banks, bank holding companies and savings and loans which participated in the study, $4.8 billion is in either home equity lines or loans, according to BenchMark Consulting.

Home equity lines of credit are responsible for 59 percent of all consumer loan products at the respondent institutions, up from 45 percent in 2002.

Like the Energizer Bunny, Research Manager Penny Hayes reported at the recent Consumer Bankers Association's annual Home Equity Lending Conference at the Sheraton Wild Horse Pass Resort just outside of Phoenix, lines "just keep going and going and going."

Straight equity loans, on the other hand, fell in popularity, "retrenching" from 30 percent of the participants' portfolios last year to just 24 percent this year. Even at the lower figure, though, the popularity of equity loans far outpaces that of automobile loans, which now account for a mere 7 percent of all debt outstanding.

The study is the 17th by BenchMark Consulting for the CBA. But for the first time, it separates out 13 repeat participants, a step that Hayes says allows researchers to "get a better handle" on trends in the home equity sector.

However, the analyst admitted that the survey leaves many questions unanswered.

For example, there appears to be a marked upswing in the use of home equity products by seniors over the age of 65 and a corresponding decline in usage by homeowners in the 20-34 age bracket. But why that is the case was not asked.

Also, while 59 percent of all respondents' portfolios were the result of new bookings, portfolios actually grew only 30 percent because 29 percent of all accounts were closed during the survey period. But what can be done to minimize portfolio run-off was not discussed.

Presumably, most of the account closings were the result of refinancing into new first mortgages or the outright sale of the underlying property. To take either of those steps, second liens must be paid off.

But another study indicates that borrowers would prefer to keep their equity lines of credit in tact when they move or trade in their old loans. In other words, they want their loans "to go."

In the survey by Synergistics, also an Atlanta research firm, 2,000 borrowers were asked to rate the concept of portable equity credit products that could be transferred from one property or loan to another without having to reapply or requalify. Close to half liked the idea.

"These finding indicate that a 'portable' equity credit product has the potential to be a powerful weapon in the competitive equity credit marketplace," said Synergistics' William McCracken.

According to the BenchMark survey, meanwhile, the average size of outstanding credit lines increased for the second consecutive year -- from $29,000 in 2001 to $30,000 last year and again to $36,000 this year.

But the average size of home equity loans slipped this year to $37,000 from $40,000 in 2002. Still, it is higher than the $33,000 recorded two years ago.

Usage isn't what it was in the 1990s, when anywhere from 81 percent to 85 percent of credit lines were active. But at 77 percent, it is back up from the record low of 75 percent recorded in 2002.

At the same time, though, consumers are now tapping into only 49 percent of the credit available to them with their equity lines, down from 53 percent last year and 56 percent in the early '90s.

The study also found:

• Appraised values this year are the highest ever, with the average now at $250,000. But for the 13 repeat respondents, the typical appraised value is 17 percent higher, or $289,000.

• Refinancing and debt consolidation is no longer the main reason owners are tapping their home equity. Now, it is "other," an indication, said Hayes, that borrowing against one's house now "has much broader acceptance."

• More than two-thirds of home equity borrowers have a deposit relationship with their lenders. But only one-in-eight depositors have a home equity loan or line.

• Not surprisingly, lenders are taking longer to process loan applications. "It is sheer volume," the BenchMark analyst said, noting that it now takes almost the same number of days -- 12.4 -- to approve a borrower as it did during the height of the previous refinance boom in 1996-1997. Nearly a third of the respondents need at least 25 days after receiving an application to close.

• Delinquencies are down in home equity lines and overall consumer credit, but up in home equity loans. But even at 1.55 percent, the rate is extremely low compared to first mortgages.