A once-popular loan Americans use to finance home renovations and college tuition is slowly dying, slashing a lucrative source of revenue for the nation’s largest banks.
Home equity lines of credit, open-ended loans that homeowners tap for cash using their properties as collateral, exploded in the run-up to the housing crash a decade ago, doubling in volume from 2003 to 2006, according to the Federal Reserve Bank of New York. Rapidly climbing property prices led homeowners to use their homes as piggy banks, fueling consumer spending.
But a resurgent housing market after the Great Recession hasn’t brought with it a return to Helocs, as they’re commonly known. Home equity lines have fallen by almost half in the past decade, New York Fed data show. The loans, which comprised 5% of the nation’s banking assets in 2009, now account for less than 2%, according to the Federal Deposit Insurance Corp.
Record levels of home equity -- spurred by soaring home prices and stagnant mortgage borrowing -- haven’t prompted households to use a ready resource as a way to fund big-ticket purchases or home improvements. Finance executives have spent years researching the issue, commissioning surveys and studies to figure out how to jump-start a business that had always been a reliable and relatively low-risk source of earnings.
Fallout from the housing bubble appears to have had a lasting effect on consumers’ willingness to keep using their homes as an ATM. Just 4% of households had an open home equity line in 2016, according to the Federal Reserve’s most recent comprehensive survey of households’ finances, a far cry from the 10% that annually borrowed against the equity in their homes during the 2000s.
“The Heloc market has been in decline since 2008,” said Otto Pohl, a spokesman at Figure, a financial-technology firm that offers a type of Heloc. In the “bubble years,” Pohl said, banks almost as a matter of course added home equity lines along with a borrower’s initial mortgage.
Those days are gone. At Bank of America Corp., the nation’s second-biggest bank by assets, Helocs produced $552 million of interest income in the third quarter, down two-thirds from a decade ago. Interest rates on the loans were the third-highest among the lender’s various types of assets, trailing only credit cards and a catchall category called “other.”
Equity Growth
U.S. homeowners collectively had $6.3 trillion of housing equity they could borrow against as of June, according to analytics firm Black Knight Inc., more than double the $2.6 trillion total in 2009.
Finance-industry executives cite three culprits they think are probably responsible for the gradual demise of Helocs: An unusual trend in interest-rate spreads, easy access to unsecured personal loans from online lenders and psychological scars from the housing bust.
Home equity lines function like credit cards, in that lenders set a maximum amount that homeowners can borrow at any one time. Also like credit cards, they’re based on the prime rate, with lenders charging a bit extra depending on a borrower’s creditworthiness. The prime rate, now at 5%, moves with the federal funds rate set by the Fed.