Home equity lines of credit are not only becoming less popular than equity or second loans, but a growing share of outstanding HELOCs are becoming inactive, according to a recent banking study.
While the number of new HELOCs dropped 24% during the first half of 2006 from the first half of 2005, continuing a three-year trend, the number of new home equity closed end loans “experienced a significant increase” of 54%, according to the Consumer Bankers Association’s 2006 Home Equity Lending Survey.
The average size of those accounts increased at much the same rate, in the 12-14% range, for both types of lending, CBA said.
Average outstanding portfolio dollars for equity lines did increase 26% in 2006 in comparison with 2005, but average portfolio dollars for closed end loans increased 61%. And while the number of HELOCs outstanding increased 42%, the number of closed end loans outstanding increased 79%.
This trend away from equity lines occurred despite an increase in the number of institutions, 51% up from 36% in the previous year, offering equity lines in which the interest rate is fixed on the drawn portions.
The share of active HELOCs dropped to 80% from 85% in 2005, according to the survey of 46 member institutions. The results were analyzed for the CBA by BenchMark Consulting International.
Lenders showed some increased caution in originating equity products.
While the number of equity lines and loans increased in number, the percent that were of C- or D-rated credits declined, falling to about 83% this year compared with 88% last year.
The percent of home equity lines and loans that exceeded 80% of LTVs fell, from 44% to 34% for lines and from 40% to 38% for closed end loans. Still, the LTVs for new equity lines and new closed end loans increased, to 71% from 65% for lines and to 69% from 60%.
None of this year’s respondents reported a maximum collateral LTV of 120% or more, compared with 3% in 2005 and, in 2004, 9% for lines and 14% for loans.
However, more of the banks surveyed, 80% compared with 72% last year, were now offering nonowner occupied home equity products. And the portion not offering the interest-only payment option on HELOCs fell to 5% from 15%.
The use of full appraisals for all equity lines and loans fell 1%, and the use of drive-by appraisals for both equity products fell nearly 5%. And the use of tax assessments fell from less than 8% to more than 12%. “Statistical/desk top” continued to be the leading appraisal method, being used for 40% of equity lines and loans, up several percentage points from 2005.
The use of auto property valuation fell to only half of responding banks from 63% in 2005.
Borrowers who took out equity lines and loans in 2006 appeared to be stronger than those who took out the loans in 2005.
The average credit score of approved borrowers rose to 730 from 2005’s 727 and 2004’s 726. And the average household income for equity borrowers rose 9% to $88,451 compared with 2005.
The appraised value of pledged collateral rose 22% to $337,735.
The age of equity borrowers trended upward. The share under age 49 decreased by 5% while the share in the 50-64 age group increased by 9.7%.
The most common use of equity borrowings was to refinance debt — 45% of equity loan funds and 35% of equity lines were used for this purpose. Home improvement ranked second, with one-fourth of both equity line and equity loan borrowers using the funds for this purpose.
HELOC delinquencies rose 73% in 2006 while total line delinquency dollars increased by 49%. But equity loan delinquencies fell 35% and the size of loan delinquency dollars fell by 10%. Foreclosures on equity lines was 0.09% and on closed end loans was 0.08%. However, recovery dollars for both types of closed end loans increased from 2005, by 26% for lines and by 50% for loans.
