A mericans of all income levels have increasingly turned in tough times to the equity in their homes, using it to back relatively cheap, tax- advantaged loans. Home equity loans, which totaled an estimated $420 billion at the end of 1997, have also been widely used to finance the accoutrements of an upwardly mobile lifestyle-home improvements, hefty college tuitions, and sports utility vehicles.
Within the home equity market, though, there is a clear economic divide between the generally upscale users of standard home equity lines of credit and loans and those with blemishes on their credit records who take out subprime loans.
A recent study by the Federal Reserve Board found that home equity borrowers overall are an affluent, well-educated group with more expensive homes than homeowners overall.
Meanwhile, a 1997 study of subprime borrowers commissioned by the Home Equity Lenders Leadership Organization, an industry trade group, paints a far different picture of that group of borrowers.
The study by John C. Weicher, a senior fellow at the Hudson Institute, suggests these borrowers are younger and poorer than American homeowners overall-though Mr. Weicher disagrees with that interpretation of his findings.
First, the data: Mr. Weicher found that 42% of subprime borrowers had incomes between $25,000 and $50,000. A third of homeowners overall fall in that income group.
Compare that also to borrowers with equity lines of credit in 1997. The Federal Reserve found that only 25% of those with credit lines fell in that income group. Further, 61% had incomes above $50,000 and 19% of line-of- credit borrowers had incomes above $75,000, according to the study published in the April issue of the Federal Reserve Bulletin.
Mr. Weicher's study found that only 8% of subprime borrowers earned more than $75,000. Overall, 18% of homeowners fell in that group last year, according to the Federal Reserve.
Mark Zandi, chief economist of Regional Financial Associates, West Chester, Pa., said the numbers show that subprime borrowers are mainly low- to-middle-income households, whose incomes have not kept pace with inflation over the last quarter century.
These households turned to credit card debt to maintain their living standards, Mr. Zandi said, and then took advantage of rising home prices and aggressive marketing of subprime loans to consolidate their credit card, auto and personal loans into subprime first and second mortages.
Mr. Weicher interprets the demographic distribution of subprime borrowers as outlined in his report a bit differently.
"There are relatively few wealthy subprime borrowers," Mr. Weicher pointed out in an interview, but nor is the group "particularly poor." The group's median income, $34,000, is slightly lower than the median income of all U.S. households that own homes, but exactly the same as the median income of all American households, Mr. Weicher said in the report.
"These data suggest that home equity borrowers are basically the same sorts of households as other homeowners," the report said.
Mr. Zandi, who disagrees with that analysis, added that subprime households-and lenders-are most vulnerable during economic downturns. Many of these borrowers draw hourly wages and are likely to see their hours of work and incomes cut first during an economic slowdown, Mr. Zandi said. Their homes are also more likely to have stagnant or declining values, he said.
He warned that subprime lenders could face tough times down the road, particularly if borrowers who have cleared their credit card bills with home equity loans run up those bills again when they hit a rough economic patch.
If subprime borrowers are more likely to be downscale than upscale, home equity borrowers as a whole are just the opposite, according to the Federal Reserve Board.
The Federal Reserve, which gathered data for its study through the University of Michigan's monthly consumer survey, came up with several measures that underline the relative affluence of home equity borrowers as a whole. Those with lines of credit are particularly well-off.
Here are some of those measures.
In 1997, the median market value of all homes was $98,000. Homes owned by those with a home equity loan had a median market value of $110,000, and those owned by homeowners with an equity line of credit had median values of $140,000.
Home equity line-of-credit borrowers had typically 16 years of education and an income of $60,000, while homeowners overall who had 13 years of education and a median income of $40,000.
Home equity line-of-credit borrowers had a median home equity of $76,000 while typical homeowners had equity of $60,000 in their homes.
It would appear that unlike subprime lenders, those making home equity loans to this group have little to fear from an economic downturn. Past experience certainly suggests that.
According to the American Bankers Association, home equity lines of credit enjoy the lowest delinquency rates of all loan types-typically less than 1%, while home equity loans have only slightly higher delinquencies at 1.25%.
The Federal Reserve Board said home equity credit has ballooned since 1977 when just 5% of homeowners had home equity credit. Last year, 13% of homeowners borrowed against their home equity.
And, the study pointed out, home equity credit would have grown even faster if Americans had not cashed out some of their equity when they refinanced into lower-rate mortgages earlier in this decade. The proliferation of high-loan-to-value first mortgages has also constrained home equity credit for many homeowners, because they simply have less equity to borrow against.
The home equity market got a big boost in 1986 when Congress took away the tax advantages of auto, credit card and other consumer loans. Mortgage debt became the most desirable for households, because interest on mortgage debt remained tax-deductible.
The Federal Reserve's recent survey showed that home equity loans and lines of credit are most commonly used to pay for home improvements and repay other debt. But a significant share of those with lines of credit cited other uses: 18% of borrowers said they used the credit for business expenses and 37% said they used it to finance automobile or truck purchases.