Equity Loans Still Cutting into Profits

  Credit cards eventually will attract more revolvers after essentially being shut out the past five to six years as cardholders have used low-interest, tax-deductible home-equity loans to pay off their credit card bills.
  But for now home-equity loans, which are secured by the borrower's residence, still are a much better deal if the borrower itemizes his personal income taxes, observers say.
  But even that advantage is dwindling. "Homeowners dined at the home-equity buffet table when loans were 4% and property values were rising 25%, but things have changed," says Greg McBride, senior financial analyst at Bankrate.com, a Web-based aggregator of financial information.
  Credit card loan interest rates for issuers' best customers, and interest rates on home-equity loans, are nearly equal following two years of Federal Reserve interest-rate increases, McBride says. As such, he says, some homeowners may consider keeping their credit card loans because property values are not rising as fast as they once did.
  There also is another factor: homeowners may have to borrow more on their credit cards because they have less equity to tap into from their homes, Michael M. Archer, senior vice president and managing director of MasterCard Advisors, noted during a speech in May at SourceMedia's Card Forum in Ft. Lauderdale, Fla.
  Keith Leggett, senior economist for the American Bankers Association, however, disagrees. "There's $11 trillion in untapped equity, and there's a total of $8.9 trillion in mortgages, which include home-equity lines of credit," Leggett says. "Over the last five to six years, homeowners have substituted home-equity loans for credit cards; we haven't seen any real pickup in credit card debt."
  Credit card debt results have been mixed, the ABA says. In the first quarter ended March 30, there was a 0.7% drop in credit card debt. That was followed by 4.5% growth in the second quarter, the association reports.
  Home-equity loans have had the upper hand over credit cards for some time. Ken Posner, equity analyst and managing partner at Morgan Stanley, says outstandings last year for home-equity lines of credit grew by 20% compared with a 4% growth rate for credit card receivables.
  Consumers use funds from home-equity loans for many things, including to pay down or pay off credit card debt. As a result, Posner predicts growth in card receivables will fall to 3% this year before dropping to 2% in 2007.
  Beyond 2007, card receivables will experience negative growth, Posner says. This is quite a drop from early in the 1970s. Between 1970 and 1974, card receivables averaged 14% annual growth, Posner says.
  Several factors will contribute to the negative growth in credit card receivables, Leggett explains. "Consumers appear to be curbing spending, as evidenced by June's retail sales figures, and they may want to save more," he says. In June, retail sales at stores open at least one year rose 2.8%, which was below analysts' expectations of 3% growth.
  "This is the first time we have had a negative savings rate since the Great Depression, and that doesn't bode well for the card industry," Leggett says.
  Archer believes credit card loans may have a chance to take a bite out of the home-equity borrowing because the interest rates are fairly close. As of July 5, interest rates on credit cards for issuers' best customers ranged from 6.9% to 7.99%. By comparison, interest rates on home-equity loans averaged 8.2%, according to Bankrate.com.
  The interest rates may be almost equal, but McBride believes home-equity lines of credit are a much better deal because of the tax benefits.
  Leggett agrees, adding that consumers who receive home-equity loans can deduct interest payments on their federal and state income taxes if the borrower chooses to itemize. Interest on credit card loans is not deductible.
  "In effect, the tax deduction lowers the interest rate," Leggett says. "Home-equity loans have re-charted the growth rate of credit card receivables."
  Though conditions have improved for issuers seeking interest income, most consumers in the near future likely will favor home-equity loans to pay off credit card debt.
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