Banks are increasingly using home equity loans to feed consumers' growing appetite for credit.
Last year banks expanded their home equity lending by 25%, to $112.3 billion. The jump occurred while overall consumer lending-auto, home equity, first mortgage, and credit card-rose just 17%, according to information prepared for American Banker by Sheshunoff Information Services.
A direct comparison of home equity loan volume with other types of consumer lending is difficult because most other loans are securitized, while home equity loans tend to be held in banks' portfolios.
But experts said that the growth in home equity lending is real-and that there's good reason for it. Home equity lending "is a very good business line," said James Chessen, chief economist at the American Bankers Association. "Banks are meeting customers' demand for a vehicle to consolidate all their debt."
The products-which let consumers tap the value that has built up in their homes-offer bank customers a relatively cheap, tax-deductible source of funds to pay for needs ranging from home improvements, to cars, to weddings, experts said.
The loans have plenty of benefits for banks, as well. "Home equity is one of the highest-margin consumer loans a bank can offer," Mr. Chessen said.
"From a credit point of view, we experience fewer delinquencies than with other types of consumer loans," added Charles Maraziti, senior vice president and manager of consumer credit for Summit Bancorp, Princeton, N.J.
Banks tend to hold home equity loans in their portfolios rather than securitize them because the credits offer decent returns for relatively little risk, Mr. Maraziti said.
Lenders also like to keep home equity loans on their books because cross-selling opportunities can be built from information gleaned through applications and servicing records, he said.