Falling interest rates made 1998 a historic year for the mortgage industry-but apparently stunted growth in bank home equity lending.

The top 100 commercial banks held $157 billion of home equity loans and credit lines at yearend-a paltry 0.76% more than at the beginning of 1998.

Commercial banks overall had $177 billion of home equity assets on the books, up just 1.61%. The industry had experienced double-digit growth rates in home equity in 1997 and 1996.

Home equity originations tend to increase when interest rates rise, because homeowners prefer to preserve to lower interest rates on their first mortgages, noted Michael McMahon, an analyst at Sandler O'Neill & Partners.

A record $1.5 trillion of first loans were originated in 1998. "A lot of people not only refinanced but took cash out," Mr. McMahon said. "Had we had a high interest rate environment, those that need additional funds for debt consolidation or to add kitchens would have taken out home equity lines."

Indeed, the largest portfolio of home equity assets, held by Bank of America Corp. of Charlotte, N.C., shrank 11.2%, to $19 billion.

"For the past 18 months there's been a relatively flat interest rate environment, and many people have been taking all their consumer debt, including home equity lines, and rolling them into mortgages," a Bank of America spokeswoman said.

Some banks offset market shrinkage by making deals with asset-starved independent home equity lenders.

U.S. Bancorp, for example, increased its home equity assets by more that 20% during 1998. The bank said in October that it would invest $20 million in New Century Financial Corp. and buy a portion of the home equity company's loans. U.S. Bancorp has also been a major buyer of second mortgage loans from FirstPlus Financial Group, which filed for bankruptcy protection this year.

Citigroup had the biggest increase in closed-end home equity loans holdings: Its portfolio grew 190%, to $355 million. In December a Citigroup-run fund, Greenwich Street Capital Partners, boosted its stake in the ailing subprime lender IMC Mortgage Corp. to 95%.

Observers said that Citigroup's jump in closed-end home equity loans could be due in part to pools of loans bought from IMC. A Citigroup spokesman said he could not specify by press time.

The home equity industry was thrown into turmoil last year by unexpected prepayments and volatile capital markets in the fourth quarter. Companies that had relied on the asset-backed bond market to dispose of their loans found they could no longer securitize profitably. Several went bankrupt.

George Bicher, an analyst at Bankers Trust, said that portfolio lenders in the consumer finance business, such as Citigroup's Commercial Credit unit, are "enjoying the fact that many of the securitizers have vanished from the competitive landscape. The pricing and quality environments are better."

The biggest gainer in overall home equity asset growth was Colonial BancGroup of Montgomery, Ala., whose holdings jumped 75%, to $466.8 million.

"The number of customers we've been able to contact or approach has been increased by growth in the bank's assets and (in) the mortgage company's servicing portfolio," said Flake Oakley, Colonial's chief financial officer.

Colonial's assets grew 52%, to $10.5 billion, in 1998. At yearend it serviced $14.2 billion, up 33.6% from a year earlier. The bank expanded geographically too, lending for the first time in Texas, Nevada, and Washington State, and bought other banks in Florida and its home state of Alabama.

For the last few years Colonial has been aggressively marketing home equity loans and lines to customers, through statement stuffers, telemarketing, and public advertising, Mr. Oakley said.

Colonial likes home equity lending, Mr. Oakley said, because it creates long-term, secured assets for the bank's portfolio. The bank will not lend more than 100% of a home's value. "Returns and spreads have been reasonable, even though they've been coming down."

Chevy Chase Bank of Chevy Chase, Md., led the pack in growth of revolving lines: Its portfolio increased 54.5%, to $230.7 million.

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