Despite the weak economy, banks markedly increased their home equity lending in 1991, according to new studies released by banking trade groups.
Home equity lines of credit climbed 15% last year, to $70.4 billion, according to a study released on Thursday by the American Bankers Association.
Banks with at least $5 billion of assets led the charge, registering a stunning 24% growth rate in home equity lines.
David Olson, a consultant who helped develop the ABA study, said many big banks aggressively advertised the credit lines last year and increased their purchases of home equity portfolios from smaller lenders.
While some regulators have voiced concern about the rapid growth of home equity loans, both the ABA study and a similar one released by the Consumer Bankers Association found that banks are closely monitoring credit quality.
According to the ABA, 62% of the 29 large banks in the study tightened their lending standards for home equity lines last year. Among four classes of smaller banks, 31% to 38% raised their standards.
Indeed, the credit characteristics of home equity borrowers appear to have improved last year. Their average annual income, $51,398, was 2.5% more than a year earlier, according to the Consumers Bankers' study.
Also, borrowers had held their jobs for slightly longer and owned their homes longer than in previous years.
In March, Federal Reserve Board Governor John LaWare voiced concern at a Consumer Bankers conference about credit quality, worrying particularly that borrowers were taking out loans to see them through periods of unemployment.
"While the recent record has been reasonably good and the business still offers real opportunities for banks," he said, "there are some emerging trends that may deepen the worry wrinkles on regulators' faces."
The Consumer Bankers' study, however, could ease some of the worry. It found that delinquencies of 30 days or more on home equity lines fell to 1.36% in 1991 from 1.55% in 1990.
"It is noteworthy that the creditworthiness of home equity borrowers has increased in each of the past six years," said Richard DeMong, a professor at the University of Virginia's McIntire School of Commerce, which worked on the Consumer Bankers' study.
The two studies differed, however, on how borrowers use their home equity lines.
The Consumer Bankers found that borrowers overwhelmingly used their lines for debt consolidation in 1991, rather than for home improvement.
The ABA study found that borrowers at big banks continued to use their loans for home improvement. At banks with less than $5 billion of assets, however, debt consolidation was the leading use.
Some bankers feel more comfortable with making loans for home improvement because the proceeds are used to increase the value of the collateral. But others say they have detected no difference in delinquency rates related to use.
Mr. DeMong said many consumers responded to widespread publicity about high interest rates on credit cards by paying off outstanding card balances with home-equity borrowings. Consumers also may have responded to the fact that interest on home equity loans is tax deductible, unlike interest on other consumer loans.
The three banks with the largest home equity holdings at yearend, according to the ABA, were all based in California: Bank of America, Wells Fargo Bank, and Security Pacific National Bank, in descending order.
The merger of Bank of America and Security Pacific in the first quarter of 1992 has resulted in a $5.9 billion portfolio.