A once-popular loan Americans use to finance home renovations and college tuition is slowly dying, slashing a lucrative source of revenue for the nation's largest banks.
Home equity lines of credit, open-ended loans that homeowners tap for cash using their properties as collateral, exploded in the run-up to the housing crash a decade ago, doubling in volume from 2003 to 2006, according to the Federal Reserve Bank of New York. Rapidly climbing property prices led homeowners to use their homes as piggy banks, fueling consumer spending.
But a resurgent housing market after the Great Recession hasn't brought with it a return to HELOCs, as they're commonly known. Home equity lines have fallen by almost half in the past decade, New York Fed data show. The loans, which made up 5% of the nation's banking assets in 2009, now account for less than 2%, according to the Federal Deposit Insurance Corp.
Record levels of home equity — spurred by soaring home prices and stagnant mortgage borrowing — haven't prompted households to use a ready resource as a way to fund big-ticket purchases or home improvements. Finance executives have spent years researching the issue, commissioning surveys and studies to figure out how to jump-start a business that had always been a reliable and relatively low-risk source of earnings.
Fallout from the housing bubble appears to have had a lasting effect on consumers' willingness to keep using their homes as an ATM. Just 4% of households had an open home equity line in 2016, according to the Federal Reserve's most recent comprehensive survey of households' finances, a far cry from the 10% that annually borrowed against the equity in their homes during the 2000s.
"The HELOC market has been in decline since 2008," said Otto Pohl, a spokesman at Figure, a financial-technology firm that offers a type of HELOC. In the "bubble years," Pohl said, banks almost as a matter of course added home equity lines along with a borrower's initial mortgage.
Those days are gone. At Bank of America Corp., the nation's second-biggest bank by assets, HELOC produced $552 million of interest income in the third quarter, down two-thirds from a decade ago. Interest rates on the loans were the third-highest among the lender's various types of assets, trailing only credit cards and a catchall category called "other."
Equity growth
U.S. homeowners collectively had $6.3 trillion of housing equity they could borrow against as of June, according to analytics firm Black Knight Inc., more than double the $2.6 trillion total in 2009.
Finance-industry executives cite three culprits they think are probably responsible for the gradual demise of HELOCs: An unusual trend in interest-rate spreads, easy access to unsecured personal loans from online lenders and psychological scars from the housing bust.
Home equity lines function like credit cards, in that lenders set a maximum amount that homeowners can borrow at any one time. Also like credit cards, they're based on the prime rate, with lenders charging a bit extra depending on a borrower's creditworthiness. The prime rate, now at 5%, moves with the federal funds rate set by the Fed.
That's more expensive than the typical 30-year mortgage, an interest rate that generally tracks the yield on the 10-year Treasury note. The average rate on a new HELOC was 6.45% as of Sept. 30, according to Informa Financial Intelligence. Borrowers looking to exchange equity for cash in a refinancing are being offered an average rate of 3.99%.
When mortgage rates are at least 1 percentage point lower than the rate on HELOCs, borrowers looking to pull equity from their homes typically opt for a cash-out refinancing over a home equity line of credit, said Rutger van Faassen, a vice president of consumer lending at Informa. Add to that the fact that a new mortgage offers a fixed rate instead of the variable HELOC and the option becomes even more attractive, he said.
Unsecured personal loans pose another threat to the HELOC business. Many online lenders offer cash in a day, and years of quick turnaround times with their online purchases have conditioned consumers to expect speed when they access credit, said Mark Ford, head of personal lending and card solutions at SunTrust Banks Inc.
Home equity lines require a daunting pile of paperwork and the added headache of a new home appraisal. Typically it takes about 45 days from the date of the application for a borrower to get the cash, according to Informa. Another obstacle: Borrowers who default on a HELOC, unlike on a personal loan, probably lose their homes.
Lauren Anastasio, a financial adviser at Social Finance Inc., the lender better known as SoFi, said her clients often pick personal loans over HELOCs, despite the higher interest rate, because of the quicker processing time. A recent survey by J.D. Power found that consumers rated online lenders above home equity providers when it came to customer satisfaction.
Banks are responding. Citizens Financial Group Inc. has reduced its processing times by half, to 35 days, according to Brendan Coughlin, head of consumer deposits at the Providence, Rhode Island-based bank. Bank of America will allow prospective borrowers to apply online, said Steve Boland, head of consumer lending.
Those efforts may never return the home equity industry to its glory days. Too many homeowners were scarred by the housing bust, and they've reduced their borrowing as a result. Overall household debt has fallen over the past decade, after adjusting for inflation, New York Fed data shows. And some borrowers are wary about putting their house on the line, van Faassen said.
"It's really the perfect storm," SoFi's Anastasio said, citing interest rates and personal loans as key drivers working against HELOCs. Sentiment could change if mortgage rates go up, but for now, "each one of those has an advantage relative to HELOCs."
