Home equity loans and lines of credit continue to grow in popularity, and banks have gradually gained an edge in consumer lending by pushing those products.
One reason home equity credits are so popular with consumers is that their rates are low, making them more attractive than - and increasingly a substitute for - credit cards.
According the Federal Reserve, the outstanding value of home equity loans and lines rose 68% from yearend 2000, to $827 billion on Sept. 30, the most recent figure available. And the untapped amount customers could borrow is estimated to be in the trillions of dollars.
"A lot people we speak with talk about a line of credit as being almost a requirement to manage your finances," said Ken Carter, the head of National City Corp.'s national home equity division. "I remember 20 years ago people with home equity loans were on the slippery slope to bankruptcy. Now it is really a smart way to manage your finance, because it is the least expensive way, [and] it gives you the most flexibility as to when you take the money and when you pay it back."
One in four households with a mortgage also has a home equity loan or line of credit, and Mr. Carter expects that number to double in the next 10 years. According to the Fed, U.S. households own a combined $15.7 trillion of real estate equity and have $7.1 trillion of mortgage debt outstanding. Theoretically, that would mean there is $8.6 trillion ready to be borrowed in the form of home equity products.
Denis Laplante, an analyst with Keefe, Bruyette & Woods Inc., wrote in a report last month that the home equity market could grow by around $2 trillion.
While banks are selling more home equity lines, credit card lenders could start to suffer. Customers are tapping home equity loan products to pay down credit card debt.
In response, some card companies have decided to join the home equity party. Capital One Financial Corp. took a step in that direction when it announced in mid-December that it would buy eSmartloan, a mortgage and home equity loan originator, for $155 million in cash from National Bank of Kansas City.
Home equity products have their limits, of course.
Analysts said rising interest rates could slow home equity lending, though not dramatically.
"Home equity is still going to be the cheapest form of borrowing, no matter how what the interest rate environment," said George R. Yacik, a vice president at SMR Research Corp., a Hackettstown, N.J., company that provides rankings of home equity lenders. If a home equity loan carries a rate of 8%, a credit card loan will probably carry a rate of 19%, he said.
Some people, many of them elderly, will never take out a home equity loan or line of credit, because they simply do not want to spend money on things like home improvement. Also, there are some people who do not have the income to support a home equity loan. Those two groups make up roughly half of potential borrowers, according to a rough estimate by Mr. Yacik.
Also, home equity loans and lines or credit are currently popular in part because they are tax deductible. That could change, however. A report last month to the Senate Finance Committee raised the possibility of taking away the deduction.
And, virtually everybody expects loss rates to rise as the portfolios grow and the loans season.
"Super-normal portfolio growth to us conjures up images of lax underwriting standards, rising delinquencies, and higher portfolio losses," Mr. Laplante of Keefe Bruyette wrote in his report. However, "the macro factors that could possibly lead us down that path are not in place yet."
Mr. Laplante, did warn that "the current healthy profitability of the product may slip below target returns," in part because unusually low credit costs will have to increase to normal levels. Promotional rates could shrink profits as well, "even more as the business becomes more seasoned and more mature."
Mr. Carter agreed with that prediction, though he tempered his comments by saying credit quality would probably not deteriorate significantly. "We are expecting a negative change in credit quality in home equity but I don't think its going to be something terribly serious."
Nevertheless, many observers expect home equity portfolios to grow between 20% and 30% a year for several years. National City says it wants its home equity business to grow at double that rate.
Citigroup Inc. has set its growth target at 80% this year, Alan R. Dakay, the president and CEO of Citi Home Equity, said in an interview Friday.
Home equity loans are secured with what most analysts, bankers, and economists say is a consumer's most prized possession: the home. Hillary Hayes, a portfolio manager at KeyCorp's Victory SBSF Capital Management, said all bankers are "in love with home equity lending, because the risk is miniscule and it is easy to sell."
A glimpse at market share data suggests there is plenty of room to grow. According to SMR, Wells Fargo & Co. has the largest share (just over 9%). Bank of America Corp. has the second-largest (8%), followed by Washington Mutual Inc.
Mr. Yacik would not reveal the full market-share figures, which he called proprietary, nor would he say what Wamu's share was.
Mr. Carter says National City's share is about 2%.
According to Mr. Dakay, Citi began pushing home equity about five years ago, when the business was just beginning to take off. However, he concedes that others, such as Wells, had their products already in place. "We were a little late in the game."
He would not disclose what Citi's target market share is, nor where the company ranks currently.
Does the quest for more loans portend a price war? Not exactly.
"Competition remains fierce, but nobody is irrational," Ms. Hayes said.
Mr. Carter said, "There is clearly a risk in that business that it becomes a commodity and is just so generic that it is easy to sell anywhere, anytime."
He and other bankers say they have found a solution for that potential problem: Product innovation. National City now offers enhanced home equity lines of credit with a fixed-rate for a certain period of time, "to avoid any risk of rising interest rates in that period," he said.
Mr. Dakay said Citi is also working to make its product more attractive. "The process of closing still takes too long," he said. "There is a lot of opportunity to enhance the customer experience."
