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One of the mortgage products that contributed to the housing crash is booming again: New home-equity credit-line borrowings soared by 42 percent in the final three months of 2013 and were up sharply for the entire year, to $111 billion.
But does this point to a return to the “my house is an ATM” mentality that characterized excessive home-equity borrowing from 2004 through 2007, just before the crash?
Researchers at Experian Information Solutions estimate that originations of home-equity lines of credit – HELOCs in mortgage industry shorthand – rose by 58 percent in the final quarter of last year in the Western states, 38 percent in the Northeast, and 36 percent in the Midwest.
The average line of credit for new borrowers with “super-prime” VantageScores (781-850) was $120,000. VantageScores are one of the two main types of risk-evaluation scores used by lenders. More ominously, new equity credit lines extended to owners with “deep subprime” scores (300-499) increased faster than in previous years and averaged more than $60,000, roughly triple the amounts in late 2010.
A record-fast rebound in owners’ equity holdings tied to rising home prices is one key. Between the third quarter of 2012 and the same period last year, Americans’ real estate equity accounts expanded by $2.2 trillion, according to the Federal Reserve. That growth is offering owners more options to tap their real estate wealth to fund home renovations, tuition payments, auto purchases and a variety of other expenditures.
Mike Kinane, senior vice president of TD Bank, said that home-equity lines are providing a money-saving alternative to refinancing in a rising interest rate environment. With rates that are currently well below those quoted for fixed-rate 30-year mortgages, tapping “home equity looks attractive” to growing numbers of owners.
Lenders I interviewed for this column, however, insisted that the rapid rise in new equity lines is different this time around, under much tighter controls. Cindy Balser, senior vice president of consumer credit products for Key Bank in Cleveland, says underwriting in 2014 is more intensive than it was a decade ago. Not only are credit limits more restrained but banks like hers require full appraisals or property condition reports by licensed appraisers to supplement electronically derived valuations. •