Generous profit margins in home equity lending have disappeared, lenders say.
In recent months, tight margins on home equity loans and especially on lines of credit have become the rule in an industry trying to take advantage of its first boom in two years.
Margin pressure "has really happened in almost every major market," said Peter J. Reed, vice president of First National Bank of Chicago, the lead subsidiary of First Chicago Corp.
Margins have contracted nearly 20 basis points nationwide on home equity lines of credit from February 1994 to last month, according to HSH Associates Inc., Butler, N.J.
About a year ago, home equity lines of credit cost 7.32%, while the prime rate, on which the loans are based, was at 6%. As of January, lines, at 9.65%, were 115 points above prime, a narrowing of 17 basis points in the spread.
"The spreads are not as good as they were a year or two or three ago, but that is kind of the way of the world," said James E. Fitzgerald, executive vice president, First Fidelity Bancorp., Lawrenceville, N.J.
And "margins are going to get thinner and thinner," said David Olson, a Baltimore-based consultant on home equity lending.
That's because the market has gotten far more crowded since early last year, when the boom in refinancing of first mortgages ended. Suddenly-idle lenders then started working their way into the home equity area, looking for a new line of work. And recently, a host of new entrants, including some big-name mortgage banks, have begun home equity lending.
This week, First Fidelity, one of the nation's largest home equity lenders, introduced a home equity line of credit with an initial interest rate 1#1/2 percentage point below the prime rate. The rate climbs to 145 basis points above prime after a year.
An equity credit line with slightly different conditions was at 2 percentage points below prime when it was introduced last fall.
Mr. Fitzgerald said First Fidelity introduced the new pricing based on a perception of where the marketplace is headed. "There is no science or formula to it," he said.
And the market is headed for more growth and more demand for lower rates, he said.
Martin Neilson, executive vice president of Seafirst Bank, Seattle, said no-fee loans are more popular today at the BankAmerica Corp. unit than they were during the refinancing boom.
"The lifespan of the (home equity loan) portfolio is moving out to longer periods of time," he said, "and you have a longer time" to show a profit.
Union Planters Bank of East Tennessee, a subsidiary of Memphis-based Union Planters Corp., has eliminated all fees and makes the loans at prime.
Charles T. Bryant, president, said the bank hopes to attract customers with the aggressively priced home equity line of credit.
"This is a very competitive banking market," he said; "there is no question about that." The bank is "very pleased" with the no-points, no-fee home equity loan at the prime rate "and we plan to continue with it," he said.
Mike Ramey, vice president for direct consumer loan retail products at National City Corp., Cleveland, estimated that 75% of all home equity lines of credit now waive a closing cost.
Profit margins have also suffered because lenders have been forced to boost advertising of home equity loans, he said, and it now takes longer to turn a profit on home equity products.
But despite the shaved margins, lenders are still gung ho about home equity lending, said Mr. Neilson of Seafirst.
"It is becoming less profitable, but it is still profitable," he said. "Those portfolios perform extremely well. There is no declining interest in making home equity loans."
Meanwhile, securitization of home equity loans is on the rise, offering lenders who do not want to hold the loans an option.
Residential Funding Corp., the Minneapolis subsidiary of GMAC Mortgage Group, recently completed its first securitization of a pool of home equity lines of credit.