Owners' equity in household real estate is down by more than 50% since its peak in early 2006, according to data from the Federal Reserve.
So it stands to reason that home equity lending, which is tied to a fraction of the free and clear claims potential borrowers have in their homes, could be in for an even sharper decline.
Still, projections about the scale of the industry's contraction are startling.
JPMorgan Chase & Co., one of the nation's three largest creditors in the sector, has earmarked roughly 70% of its $100 billion portfolio for runoff — not counting impaired assets it picked up in its acquisition of the banking operations of Washington Mutual Inc.
In fact, the company expects the vast majority of its overall home lending balance sheet to melt away based on a reckoning of what can reasonably be originated under current underwriting standards and home price conditions.
After a massive buildup of mortgage debt in the first half of the decade, and a collapse in home values in the second half, there simply is not that much equity to borrow against (see charts).
At 38.1% in the fourth quarter, owners' equity as a percentage of household real estate had recovered a bit from a low of 33.5% in the first quarter of last year. But the figure was still lower than in any quarter for more than half a century before 2009.
Home equity lending has moved from a boom business in the middle of the decade — as late as the fourth quarter of 2006, about 45% of bankers identified it as the industry's best opportunity in the American Banker/Greenwich Associates Financial Services Executive Forum Survey, and home equity loans grew at an annual pace of $124.8 billion — to an industry in sharp decline.
JPMorgan Chase has projected that its home equity chargeoffs could reach $1.4 billion every quarter for the next several quarters. (Overall, it hopes its runoff home loan business will break even in 2012, when it expects to have reduced the capital it allocates to the operation by about 40%, to $5 billion.)
Still, though overall home equity lending portfolios are shrinking rapidly, new loans are being made, and Bank of America Corp. and Wells Fargo & Co., the two other biggest banking companies in the business, have emphasized their commitment to it.
(In the senior loan officer survey published by the Fed this month, 12.7% of banks reported easing their standards for home equity lines of credit in the first quarter; 7.3% said they tightened them, and 80% said their standards remained the same — the first time easing exceeded tightening since the central bank began asking about the product in early 2008. However, a net 13% reported cutting the size of credit lines for existing customers, and a net 27.2% reported slack borrower demand.)
In his company's first-quarter earnings call, Brian Moynihan, B of A's chief executive, called home equity a "core product" designed generally for wealthy customers to finance a child's education, for example. He said he expects B of A's portfolio to decline but not on the scale JPMorgan Chase contemplates.
In Wells Fargo's earnings call, CEO John Stumpf demurred on projecting the size of his company's portfolio when asked about the possibility of a contraction on the order of 50% or 75% but said that now is a good time for such lending.
"We are in that business," he said. "We sure like the performance of the vintages in the last few years."