Reeling from the sudden contraction of the mortgage market in 1994, large mortgage companies have turned to home-equity loans in a big way.
One indicator of their growing presence has been the rise in securities backed by home equity loans. According to Merrill Lynch, home equity securitizations jumped to $15 billion in 1995, a 50% spurt over 1994.
Much of the new lending has been to borrowers with dented credit - often to people who owned their homes outright but wanted to cash out on some of their home equity. The market for borrowers with good credit is dominated by big banks - led by Bank of America - and is hard to break into.
The new players, such as GMAC Mortgage Corp., Elkins Park, Pa., view the business as a way to smooth out volatile earnings and deepen customer relationships.
In the year through February, GMAC expanded its home equity servicing portfolio by over 100% to more than $1 billion. It plans similiar growth this year.
"We'd like to be a big player," said Tony Renzi, managing director of the consumer loan servicing group at GMAC.
Part of the attraction, Mr. Renzi said, is that the home equity business is countercyclical to the first-mortgage business. When rates are low and the first-mortgage market is booming, demand for home equity loans shrinks as consumers tap into their home equity by refinancing their first mortgages.
But when rates are high, consumers take out home equity loans if they need to dip into their equity - thus swelling the demand for home equity loans just as the first-mortgage market is slowing.
Much like a big bank, GMAC wants to sell everything it can at its roughly 90 retail branches - home loans, home equity loans, reverse mortgages, and other consumer loans, said Rick Gillespie, managing director of corporate communications. GMAC is also looking at marketing all these products to other General Motors employees and customers, he said.
The home equity business is the offspring of changes in the tax law in 1986, which made home mortgage debt the only deductible consumer debt. Until then, homeowners had tapped into their equity mainly for home- remodeling projects. But after 1986, homeowners turned to home equity loans for all kinds of new uses - to pay for a child's college education, a vacation, a new car, and credit card bills.
Cultural changes also account for the boom in home equity loans, said Carlotta Willard, director of consumer loans at Norwest Corp., Minneapolis.
"If you look back at my parents or my parents' parents, they were living to pay off their mortgage and to be mortgage-free - and that's not the same as baby boomers today, who want to maximize their earnings leverage," Ms. Willard said.
Despite the hunger for credit among American consumers, the home equity market presents real challenges.
The market is growing only slowly, because of the surge in low-down- payment lending and the high proportion of first-time homebuyers.
And in large markets such as California, where market leader Bank of America is based, several years of falling home values have eaten into the home equity against which consumers can borrow.
To build its business, Bank of America has expanded the loan-to-value ratios on its home equity loans, so that the first and second mortgages add up to 100% of the home's value. The bank is also looking at lending to borrowers with subprime credit, said William Dewitt, vice president of consumer loan product management.
He said the bank is also working hard to retain existing customers and to encourage them to use more of their available lines of credit.
It's also targeting its home equity customers for other bank products.
"These are homeowners, consumers who are typically 30 to 55 years old - they tend to be spenders," Mr. Dewitt said, adding that they're likely to want other bank products, including other loans as well as investment vehicles.
Consultant Ed Furash, chief executive of Furash & Co., Washington, D.C., believes the home equity market is headed toward big change.
The boom in B and C subprime credit has led to the increased use of securitization as a way to manage the heightened risk of lending to borrowers with impaired credit histories, Mr. Furash said.
"The business is shifting from a hand-tailored, make-it-for-each- individual-customer approach to much more of a mass merchandise, mass market, consumer credit vehicle, which takes on all of the factors of becoming a commodity," he said. " We are about to see a new era of competition between mortgage companies and banks, as well as finance companies and banks."
The commoditization of the market means that only a handful of players will control most of the market, said Mr. Furash.
And over time, he said he expects the government-sponsored mortgage agencies, Fannie Mae and Freddie Mac, to become big players in the home equity market, as they too search for new opportunities in the mortgage business.
Nancy Gigante, director at Standard & Poor's, agreed that a growing portion of home equity loans will be securitized, but she expects it to be a slow process because underwriting standards vary widely among lenders.
"When they started securitizing jumbo A loans in the late 1980s, it picked up very quickly and it has become a commodity product," Ms. Gigante said. "But the underwriting guidelines were very standardized. They were Fannie Mae, Freddie Mac guidelines. The only thing that was different was loan size. It's a lot more difficult for this product to be accepted because of the lack of standardization."