Commercial banks and thrifts are offering significantly more home equity loans at lower prices, according to American Bankers Association data for the 12 months through last June 30.

The trade association found that home equity loans and lines of credit grew 15.2% and 24%, respectively, during that period after four years of fairly flat growth. From July 1992 through June 1996, growth in home equity lines averaged only 3% a year.

The rise in second mortgage lending is due to an increase in home prices and falling interest rates, said James Chessen, chief economist at the association.

The average spread over the prime rate for a second mortgage loan in 1996 was three-quarters of a percentage point, versus two percentage points the year before. In addition, "there's a lot more equity in homes than there was two years ago," Mr. Chessen said, when prices were lower. "That makes it more attractive to customers."

In addition, homeowners are now making purchases with cash from second mortgage loans and lines that they would have previously put on a credit card, Mr. Chessen said.

The first-mortgage refinancing boom that is occurring due to the recent drop in interest rates is directly affecting the home equity market, Mr. Chessen said. "When the contractual agreement of the first mortgage changes, it triggers the need to refinance a second mortgage," he explained.

One particularly significant change last year was banks' rush to high- loan-to-value lending. The proportion of large banks that were offering loans for more than 95% of a home's value increased to 68.8% in 1996 and those offering such lines of credit rose to 55%, and continues to rise, Mr. Chessen said.

High-LTV loans, especially the 125% LTV products, may "seem scary," Mr. Chessen said, "but the logic is there."

Borrowers, who often take out high-LTV loans to consolidate their credit card bills, can reduce the cost of their consumer debt this way, he said. Lenders are rewarded with increased security because the loans are at least partially backed by a home's equity.

"We used to think of loans as either secured or unsecured," he said; "now we're trying to blend the two."

The real question, Mr. Chessen said, is "how are those loans priced?"

Typically, high-LTV loans are priced at rates between unsecured and secured debt, he noted. "It's probably too soon to tell if banks are pricing those effectively," he said.

The banking industry's typical home equity customer continues to be firmly middle American: a member of a two-income family with household income of $30,000 to $70,000 and 35 to 49 years old.

The years ahead may see some slowdown in bank home equity lending, Mr. Chessen noted. "The market is maturing, and there is a tremendous amount of competition."

In addition, continued bank mergers are expected to help consolidate the home equity market, according to David Olsen, an industry consultant who analyzed the survey.

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