Average Lender Made 24% More Equity Lines Last Year, Survey Finds

A study shows that home equity lending continues to surge nationwide.

The Consumer Bankers Association study, prepared by two University of Virginia professors, found an industry growing fast - and becoming increasingly more competitive.

The study found that the number of originations last year surged 24% at the average lender surveyed, to 4,148 loans.

"I think it was a very good year, a banner year for banks," said Martin Neilson, executive vice president, Seafirst Bank, Seattle.

The study's authors, Richard F. DeMong and John H. Lindgren, surveyed 76 lenders.

The lenders had an average of nearly 40% more home equity lines of credit on their books last year, compared with those surveyed in 1993. And they averaged 57% more closed-end home equity loans during 1994.

To get that increased volume, many lenders sacrificed fees. The average lender charged borrowers $197 to use a line of credit last year, down from $325 in 1993. Waived fees averaged $247 last year.

Closed-end home equity loans were also cheaper for consumers. Average total fees for those loans were $281 last year, 22% less expensive than in 1993. Of closed-end home equity borrowers, 51% had a majority of their fees waived.

Activations of home equity lines of credit were up last year. Lenders who responded to the survey saw a 36% increase in the number of home equity lines that were activated - an average of $445,740 of lines activated at each lender.

The survey found that 86% of home equity lines of credit were activated last year. In 1993, 81% of lines were in use.

Some lenders complain about paltry activation.

"We are seeing a lot of idle credit out there," said Mr. Neilson of Seafirst Bank. "We are trying to get more activation."

At last week's American Bankers Association conference on consumer lending in New Orleans, Christine Caldwell, a vice president of Bank One in Westerville, Ohio, stressed the need for lenders to improve the usage of home equity lines among qualified borrowers.

Mr. Neilson expects lenders to start using "creative marketing" to get borrowers to activate their lines.

But most of the activity was in closed-end home equity loans. Lenders closed nearly twice as many closed-end loans than lines of credit last year.

"I am somewhat surprised that we continue to grow at these healthy rates," said Mr. Lindgren, a co-author of the study.

He said lenders were maintaining such growth by reaching further down into the market for originations.

The study found that loan-to-value ratios of closed-end and open-end home equity loans escalated last year. Loan-to-value ratios of lines climbed to 82% from 79%. And loan-to-value ratios of closed-end loans were 83%, up from 82% at the end of 1993.

But borrowers are not using home equity loans and lines recklessly, Mr. Lindgren said. "They are not hocking their house for a blouse," he said.

Rather, they were being conservative with their home's equity, he said. Most borrowers use their home equity loans for debt consolidation, home improvement, or to take advantage of tax deductibility.

More people are using their equity lines for investing and business expenses, the study shows. In 1993, only 3% of all lines were used for investments. But last year, 6% of equity lines paid for investments.

Borrowers used fewer lines of credit for home improvement last year - 22%, compared with 27% in 1993.

And more closed-end home equity loans were used for debt consolidation in 1994 - 43%. In 1993, debt consolidation accounted for 36% of home equity usage.

Mr. Lindgren expects the growth in home equity lending to continue at the same pace for at least the next few years, thanks to the tax advantage of such borrowing.

"A closed-end or open-end home equity loan is very, very advantageous for the customer," he said.

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