Banks are loosening their home equity lending standards and charging less to make these loans, a recent study reveals.
Loan-to-value ratios are increasing and borrowers' incomes are dropping, according to the Consumer Bankers Association's Home Equity Lending Survey for yearend 1997, released last week. At the same time, interest rates and fees have gone down, the study revealed.
The most dramatic expansion was the growth in the number of banks that are offering loans for 100% or more of a home's value, the study showed. About one-quarter of all banks surveyed are offering such loans, compared with just 6% a year earlier.
The influx of banks into high-loan-to-value lending "does raise concern about what will happen to the collateral if real estate prices drop-and they will again," said Richard DeMong, professor at the center for financial service studies at McIntire School of Commerce, University of Virginia. Prof. DeMong and Prof. John Lindgren, also of the University of Virginia, analyzed the study for the CBA.
Neither the Federal Deposit Insurance Corp. nor the Office of Thrift Supervision has issued specific guidelines about high-LTV lending, despite concern from legislators and economists. Not enough of their members are involved in making such loans, the regulatory agencies said last week.
Although banks' home equity tactics sound risky, they are not yet causing any problems, Prof. DeMong added. "Right now the strategy is working," he said. "Delinquency rates and chargeoffs are still very low."
Delinquency rates for home equity lines fell 26 basis points, to 1.11%, while whole-loan delinquency rates declined 23 basis points, to 2.03%.
Banks' actions, though, "raise some questions about how much longer downward trends" in spreads and fees can continue, Prof. DeMong said. Both dropped to record lows last year, the study reported.
The average spread over prime rate was 127 basis points in 1997, down from 141 in 1996 and 175 in 1995. The average fee charged for home equity lines was $216 in 1997, compared with $346 in 1996. Eighty percent of lenders waived a majority of their fees, up from 58% in 1996, the study said.
Borrowers' income also dropped-the average home equity line borrower earned $62,664 in 1997, down from $64,983 in 1996.
"Banks are opening up the (home equity) market a bit," by making loans to people with slightly lower incomes, Mr. DeMong said.
Debt consolidation continues to be the primary reason borrowers take out home equity lines and loans, the study revealed. About 40% of all home equity lines and loans are used to consolidate debt. About 25% pay for home improvements.
Direct mail continues to be the most important marketing method for home equity lenders. About one-quarter of all lenders list it as their No. 1 marketing device, followed by employee incentives at 19% and "no or low closing costs" promotions at 12%.
Forty-nine lenders, with an average asset size of $28 billion, participated in the study.