Home equity loans are on the rise across the country, with an increasingly diverse borrower base turning to the loans. And the reasons for borrowing are as diverse as the borrowers.

Both open-end and closed-end home equity loans have come out from under the stigma of being made mostly to younger borrowers with suspect credit histories.

The National Home Equity Mortgage Association says that 65% of home equity borrowers have A credit ratings, 25% "B," and 9% "C." Only 1% have D- rated credit.

The age of the typical home equity borrower is shifting as the baby boomers mature, with 50% of borrowers 35 to 49 years old. The next-highest category is those between 50 and 65 years old at 25%.

The association said that 30% of borrowers use home equity loans for debt consolidation, 20% for home improvements, 25% for medical or educational uses, and 25% for home purchases.

About 94% of home equity customers are current on their loan payments, compared with 97% of conventional mortgage borrowers and 92% of borrowers with government-guaranteed loans, according to the association.

Allen Tuthill, senior vice president of HomeSide Lending's equity services group, said that though the demographics of the home equity borrower were indeed diverse, the subprime group was largely representative of America's middle class.

"The typical subprime home equity borrower is 35 to 49 years old, with a $35,000 to $45,000 annual income," Mr. Tuthill said. "These borrowers are good, solid citizens who are very representative of middle America."

Mr. Tuthill added that about 75% of his business fell just outside of Fannie Mae's and Freddie Mac's A-minus credit rank. Despite this, the industry has been getting a bad rap for years.

"This industry gets painted as being predatory and discriminatory, which is quite unjust," Mr. Tuthill said.

He also said that since most home equity lenders take their loans to the secondary market through asset-backed securitizations, a company's servicing capabilities were vitally important.

Mr. Tuthill's equity division at HomeSide has only been operating since the first quarter of 1998. The Jacksonville, Fla.-based unit is selling all of its loans on a whole-loan basis and will not be servicing these loans for another 12 to 18 months.

Mortgage Information Corp., a San Francisco-based mortgage data base company, said subprime mortgage delinquencies were lowest in the Southwest Central region-Texas, Oklahoma, Louisiana, and Arkansas-at 3.63%, with Texas the lowest.

Since Texas made home equity loans legal a year-and-a-half ago, lenders have been scrambling for pieces of the untapped market.

But Texas has stricter rules than the rest of the country, limiting consumers to borrowing only up to 80% of the value of their home. No lines of credit are allowed and Texans can only take out a lien on one acre of their property.

Daryl Frevert, vice president of consumer lending at Houston-based Bank United Corp., said that because of these additional regulations, Texans were typically not going to take out home equity loans unless they needed the money immediately.

"The delinquency rate in Texas is very low because the home equity portfolios are very young," Mr. Frevert said. "There was a pent-up demand for home equity loans, but it has sort of leveled out."

Last year, Wells Fargo made a push into Texas and throughout 1998 the bank was among the top three lenders in that market, according to Doreen Woo Ho, group managing director for home equity.

"Right now, in our prime portfolios, we are seeing the lowest delinquency and loss rates in years, which would invite the question of, gee, maybe we should be taking more risk," Ms. Woo Ho said. But since the home equity product is new in Texas, she said, "It's not something that's naturally comfortable to the Texas consumer."

Mortgage Information also said that prepayments on subprime loans slowed in the fourth quarter last year and one in seven mortgage made in 1998 were prepaying as of December.

The research group also said that subprime prepayments generally peak in the second or third year of the loan. Its data said that prepayments were highest in the Northeast Central region-Illinois, Indiana, Michigan, Ohio, and Wisconsin.

Walter Carter, executive vice president of home equity lender Advanta Mortgage, said prepayments were not a matter of geography, but had to do with loan sourcing. For example, he said that broker loans usually prepay more quickly than consumer-direct or third party mortgages because a broker will want to place a customer into another product.

"You have to price these loans according to how you source them-meaning differently for brokered loans, whole loan purchases, or consumer-direct loans," Mr. Carter said. "We are putting more emphasis on consumer-direct because you develop the relationship with the customer instead of the broker," and those loans are less likely to prepay.

In a study for the Consumer Bankers Association, the McIntire School of Commerce at the University of Virginia conducted a home equity lending survey for yearend 1997 that found the average line of credit was $40,974 and the average line in use was $26,810.

The expected average life of home equity lines of credit is 5.9 years and 5.4 years for closed-end loans.

Further, 69% of line-of-credit applications and 67% of closed-end applications were approved in 1997, the most recent date for which data are available. Of the approved applications, 81% of the loans actually closed. This means a little over half of all applications resulted in loans.

The study said that the average home equity borrower had 2.6 dependents, held the same job for 7.6 years, and had owned the home for 7.6 years.

Direct mail was considered the most important marketing tool by home equity lenders, according to the study, followed by employee incentives and offering loans without closing costs or low ones.

Though newspaper ads ranked as the fourth most important marketing strategy, the study said that lenders spent almost as much of their budgets on newspaper advertising as they did on direct mail.

Lenders spent an average of $40 in marketing and advertising costs per home equity line of credit and an average of $33 per closed-end loans. The direct and indirect origination costs of each line of credit were $620. For closed-end loans, the costs were $568.

Commenting on the state and future of the home equity lending market, Ms. Woo Ho said, "In general, the market for home equity is still strong just because real estate values have moved up across the country."

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