It's those aging baby boomers again. As they come into a new part of their life cycle these grasshoppers will find that they need cash for lots of new reasons-and they haven't socked much away.

Their cash needs will include college tuition for their children, health care for themselves and their parents, home improvements, and retirement.

In a new report from Merrill Lynch & Co., three researchers conclude that though the boomers may be cash-poor, they are house-rich, and will be able to tap the accumulated equity in their homes to meet those needs.

Sounds good for home equity lenders. And it gets better. "With the stock market posting annual gains of well over 10% over the past few years, the opportunity cost of having funds tied up in housing, which has been appreciating at 2.5% to 3%, has been very high," the report says. "It may only be a matter of time before many feel compelled to allocate out of real assets into financial assets, or at least have the flexibility to do so" when market conditions make it appropriate.

And that's another entree for home equity lenders, the researchers say, because these loans offer the flexibility that enables homeowners to make such a shift in assets.

An additional influence is the tax-deductibility of interest paid on home equity loans, which the team says makes the loans the cheapest source of credit outside conventional mortgages.

Unless interest rates rise dramatically, this means rapid growth in home equity loans, the report says. It envisions annual loan production topping $200 billion, against about $150 billion in 1995, the most recent year for which cumulative data are available. And securitization may be headed for $50 billion to $75 billion a year during the next few years, compared with $33.5 billion last year.

The authors are Ralph Di Serio, first vice president; Chris Flanagan, senior consultant; and Weisi Tan, assistant vice president. All are in Merrill's asset-backed research department.

They say they believe technological advances will further stimulate investor interest in the home equity business. Their reasoning:

Improved financial models will enable lenders to expand their borrower bases.

Rapid electronic distribution of information on loan features will make consumers instantly aware of borrowing opportunities.

Improvements in servicing techniques will reduce losses from foreclosures.

If there is a dark side to this picture, it is that new lenders are pouring into the home equity market. For the time being, plenty of untapped business seems available for everybody. But the Merrill report says, "As improved understanding of the underlying home equity loan assets enables the sector to become increasingly commoditized, we look for spreads to follow the lead of other" asset-backed securities sectors "and move to still tighter levels."

And tighter spreads for investors mean smaller, though possibly still quite juicy, profit margins for lenders.

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