Faced with flagging demand, banks have been cutting prices on their home equity loans, a new survey shows.
The survey, by the American Bankers Association, found that banks with large home equity businesses were generally offering the loans last year at the prime rate plus 1.5 percentage points. That was down from roughly prime plus two percentage points in 1991, said David Olson, a Columbia, Md., consultant who worked on the study.
Moreover, he and others said, the price cutting is continuing this year, with some banks offering the lines at less than one -percentage point over prime.
Competition Cited
"The market is very competitive, and I expect that will be the case for the foreseeable future," said Peter Rogan, a senior vice president at New England's Shawmut Bank. Besides cutting rates, many banks are offering low or no closing costs, he said.
The price cuts come as growth in home equity lines has slowed to a crawl. Lines outstanding at all banks climbed 4.1% last year, to $73.3 billion -- marking the smallest growth since the product first appeared in 1982, the ABA said. Just a few years ago, outstandings were growing at 20% annually.
Warning on Price Cuts
Mr. Olson attributed the slowdown largely to the weak economy, which has hurt all forms of consumer lending. In addition, he said, many consumers were tapping their home equity by refinancing first mortgages, rather than taking out lines.
Mr. Olson urged lenders no to rely too heavily on price cutting to get business. "If you carry that too far, you cut your own throat," he said in an interview. Instead, the study recommended that banks boost their advertising budgets, start buying loans from brokers, and expand into new markets.
The study suggests that the most active banks in the market already are spending more on advertising. The ad budgets of these banks are up more than 40% from last year's actual spending, the survey found. Smaller banks' budgets are similar to last year's spending.
This disparity indicates that the larger lenders will post further gains in market share, the ABA said.
The bank with the most home equity lines outstanding at year-end was Bank of America, with $5.9 billion, the study found. Another California heavyweight, Wells Fargo Bank, ranked second, followed by New Jersey's First Fidelity Bank, New York-based Citibank, and First Interstate Bank of California.
