The future may be bright for the home equity business, but the good times won't last forever, according to lenders and experts at the National Home Equity Mortgage Association conference here.

Lenders, they suggested, should be especially conscious of the industry's possible commoditization, potential high delinquency rates, and increasing competition, and the importance of managing their risk.

It may not happen this year, next year, or even five years from now, but lenders and securitizers agree that the home equity loan will eventually become a commodity.

Most lenders questioned at last week's conference hope that government- backed lenders never enter the subprime market. ("Bite your tongue," said one when asked when it would happen.)

But many are gearing themselves up for that possibility by specializing in niche products.

"We make the loans that are difficult to make," said Nelson Stephenson, president of Fintek, parent company of Alliance Financial Corp.

When first-lien loans became commoditized, "a lot of mortgage lenders went running for the hills," he said at an educational session on credit scoring and risk management.

When home equity loans make that switch, customer service and varible loan products will set lenders apart, he said.

Increasing competition in the business will also drive down prices. Of the more than 50 lenders attending the risk management session, about half had not been in the business five years ago.

Economic conditions may be good now for the industry, but the distant future could spell some problems, said Mark Zandi, chief economist at Regional Financial Associates, West Chester, Pa.

"If lenders don't tighten their lending standards, and consumers don't repair their balance sheets, when the next recession hits - and we will have one - we'll see the worst deterioration of credit quality ever," Mr. Zandi said.

Hardest hit will be the lowest-earning segments of the population, who have seen average annual family income actually decline in the past 20 years.

"These are the folks that are having the biggest problems," Mr. Zandi said.

The future performance of high loan-to-value ratios characteristic of the home equity industry is being evaluated by Wall Street.

"People say these high LTV loans won't perform as badly as other high LTV loans, said Jayme Laurash, director of residential fianance at Standard & Poors Corp. "We don't think so, but we're taking a look at it."

He said S&P is also developing a loss-coverage model -adapted to regional economics - to predict performance of home equity loans.

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