Banks, eager to speed up their sluggish revenue growth, are returning to a business that lost appeal during the housing downturn: home equity lending.
Consumers are hearing the pitches in direct mail, in their inboxes, and in their bank branches. Lenders say the competition to capture home equity business is heating up and theyre looking to sweeten the deals with flexible terms.
Banks see home equity as a growing market, with home prices rising in Charlotte and elsewhere. Some borrowers who once owed more than their homes were worth now find they have equity for the first time in years.
Not a lot of people had equity in their homes, said Kelly Kockos, Wells Fargos home equity head. We have stepped up our outreach when the market started to improve.
In home equity lending, homeowners may borrow a fixed amount of money based on how much equity they have in their property. Borrowers may choose a home equity loan or a home equity line of credit. The funds are often used for home improvements, though borrowers may use them for other purposes.
Consumer advocates caution borrowers that failure to repay could result in the loss of their home, which is used as collateral. Thats why its important to make sure you have enough monthly income for the additional payments, they say.
Banks say they are being cautious about home equity lending and making sure customers can afford to borrow.
The push comes as banks feel pressure from investors to grow their revenues, which suffered from a decline in the mortgage refinance business and other factors. Last years rise in interest rates dried up demand from borrowers to refinance their mortgages. That cost banks millions of dollars in mortgage income.
Requirements more stringent
While banks are hungry to increase their home equity business, they are also cautioning borrowers that receiving approval is harder than it was during the boom times. Interested borrowers are facing more stringent requirements from lenders.
Weve ended up with a new world where home equity underwriting is significantly tougher than it was pre-crisis, said Guy Cecala, CEO of Inside Mortgage Finance, a mortgage industry publication.
Nationally, the median price for existing homes rose in 2013 by 11.5 percent, to $197,100, from $176,800 in 2012, according to the National Association of Realtors. In the Charlotte metro area, the median sales price in December was up 8.7 percent from a year ago, to $172,500, the Charlotte Regional Realtor Association said.
A recent report by real estate website Zillow predicts that U.S. home prices will rise by 4.3 percent on average this year.
Popular during the boom
Banks profited from home equity lending during the boom times as home prices skyrocketed. Critics said property owners were treating their homes like automated teller machines, spending the funds on vacations and other luxuries.
Consumer advocates say, in general, that its better not to borrow against a homes equity for luxury items that wont provide a return. Home repairs that could boost a propertys value are a more prudent use of home equity borrowing, they say.
According to Inside Mortgage Finance, new home equity loans were a record $430 billion in 2006. In 2013, new loans most likely did not top $60 billion, Cecala said.
Demand for the second mortgages fell in the downturn, as about 30 percent of the equity in U.S. homes was obliterated, he said.
Even with the housing recovery, Cecala said, weve regained relatively little of the lost equity. The current pool of home equity borrowers is a fraction of what it was.
But banks want to position themselves for the growth they are seeing. Charlottes Bank of America recorded $1.9 billion in home equity originations in the fourth quarter, up from $1 billion a year ago.
Banks are looking for ways to lend money, Cecala said. The housing market has gotten to the point where the stars are in alignment, so its the first time since 2007 that the banking industry may be in a position to grow their home equity loan business.
Strong credit score required
Matt Potere, head of home equity for Bank of America, said the bank wants to make sure its customers are responsibly borrowing against the equity in their homes.
Potere, who is based in Charlotte, said a good candidate must not only have equity but also a strong credit score, somewhere in the high 700s. The borrower must also have enough income to make payments, he said.
Kockos, the home equity executive for San Franciscos Wells Fargo, said the bank also wants to lend responsibly and is making sure that borrowers not only are able to repay but also understand the repayment period.
In November, Wells Fargo stopped offering interest-only payments for its home equity lines of credit, Kockos said. The bank believes its better for consumers to pay down principal and interest at the same time, she said.
Bank of America and Wells Fargo cap home equity lending at 85 percent of the equity in a property. Industry insiders say borrowing limits were higher before the downturn.
At the same time that banks are trying to increase home equity lending, some customers who took out home equity lines of credit 10 years ago are reaching the predetermined transition point from interest-only payments to interest and principal. That means their payments go up. Last fall, the Office of the Comptroller of the Currency, a bank regulator, warned about about the risk of delinquencies and urged banks to take early action to work with borrowers who might not be able to handle the higher payments.
Bank of America and Wells Fargo said they have been reaching out to borrowers before their loans reset to discuss their options.
During the downturn, Wells Fargo stopped advertising home equity products, Kockos said. This month, the bank sent its customers a mailing about the products, she said.
Bank of America is including new advertisements in customers mortgage statements and emails to potential borrowers.
Its your equity, reads one Bank of America ad. Make it work for you.
Big banks used to dominate the home-equity lending market, said Cecala, of Inside Mortgage Finance. Credit unions and others have emerged as formidable competitors, he said. Many borrowers, meanwhile, are reluctant to take on more debt after going through the recession. Because of all that, lenders are offering deals.
What Ive seen is (lenders) offering them very low rates if they immediately draw down a balance on it, Cecala said. Theyre also offering more flexibility in terms.
Such deals might not always work. Mark Vitner, an economist for Wells Fargo, said banks are having a hard time getting wary consumers to borrow in general.
Loan growth has been reviving over the last year, he said. But loan growth has been pretty sluggish.
One of the challenges in consumer lending is that consumers are still worried about their job and income prospects.
Roberts: 704-358-5248; Twitter: @DeonERoberts
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