Banks, eager to speed up their sluggish revenue growth, are returning to a business that lost appeal during the housing downturn: home equity lending.
Consumers are hearing the pitches in direct mail, in their inboxes, and in their bank branches. Lenders say the competition to capture home equity business is heating up - and they're looking to sweeten the deals with flexible terms.
Banks see home equity as a growing market as home prices rise. Some borrowers who once owed more than their homes were worth now find they have equity for the first time in years.
"Not a lot of people had equity in their homes," said Kelly Kockos, Wells Fargo's home equity head. "We have stepped up our outreach when the market started to improve."
In home equity lending, homeowners may borrow a fixed amount of money based on how much equity they have in their property. Borrowers may choose a home equity loan or a home equity line of credit. The funds are often used for home improvements, though borrowers may use them for other purposes.
Consumer advocates caution borrowers that failure to repay could result in the loss of their home, which is used as collateral. That's why it's important to make sure you have enough monthly income for the additional payments, they say.
Banks say they are being cautious about home equity lending and making sure customers can afford to borrow.
The push comes as banks feel pressure from investors to grow their revenues, which suffered from a decline in the mortgage refinance business and other factors. Last year's rise in interest rates dried up demand from borrowers to refinance their mortgages. That cost banks millions of dollars in mortgage income.
While banks are hungry to increase their home equity business, they are also cautioning borrowers that receiving approval is harder than it was during the boom times. Interested borrowers are facing more stringent requirements from lenders.
"We've ended up with a new world where home equity underwriting is significantly tougher than it was pre-crisis," said Guy Cecala, CEO of Inside Mortgage Finance, a mortgage industry publication.
Nationally, the median price for existing homes rose in 2013 by 11.5 percent, to $197,100, from $176,800 in 2012, according to the National Association of Realtors.
A recent report by real estate website Zillow predicts that U.S. home prices will rise by 4.3 percent on average this year.
Banks profited from home equity lending during the boom times as home prices skyrocketed. Critics said property owners were treating their homes like automated teller machines, spending the funds on vacations and other luxuries.
Consumer advocates say that in general, it's better not to borrow against a home's equity for luxury items that won't provide a return. Home repairs that could boost a property's value are a more prudent use of home equity borrowing, they say.
According to Inside Mortgage Finance, new home equity loans were a record $430 billion in 2006. In 2013, new loans most likely did not top $60 billion, Cecala said.
Demand for the second mortgages fell in the downturn, as about 30 percent of the equity in U.S. homes was obliterated, he said.
Even with the housing recovery, Cecala said, "we've regained relatively little" of the lost equity. "The current pool of home equity borrowers is a fraction of what it was."
But banks want to position themselves for the growth they are seeing. Bank of America recorded $1.9 billion in home equity originations in the fourth quarter, up from $1 billion a year ago.
"Banks are looking for ways to lend money," Cecala said. "The housing market has gotten to the point where the stars are in alignment, so it's the first time since 2007 that the banking industry may be in a position to grow their home equity loan business."
Matt Potere, head of home equity for Bank of America, said the bank wants to make sure its customers are "responsibly" borrowing against the equity in their homes.
Potere said a good candidate must not only have equity but also a strong credit score, somewhere in the high 700s. The borrower must also have enough income to make payments, he said.
Kockos, the home equity executive for San Francisco's Wells Fargo, said the bank also wants to lend responsibly and is making sure that borrowers not only are able to repay but also understand the repayment period.
In November, Wells Fargo stopped offering interest-only payments for its home equity lines of credit, Kockos said. The bank believes it's better for consumers to pay down principal and interest at the same time, she said.
Bank of America and Wells Fargo cap home equity lending at 85 percent of the equity in a property. Industry insiders say borrowing limits were higher before the downturn.
At the same time that banks are trying to increase home equity lending, some customers who took out home equity lines of credit 10 years ago are reaching the predetermined transition point from interest-only payments to interest and principal. That means their payments go up. Last fall, the Office of the Comptroller of the Currency, a bank regulator, warned about the risk of delinquencies and urged banks to take early action to work with borrowers who might not be able to handle the higher payments.
Bank of America and Wells Fargo said they have been reaching out to borrowers before their loans reset to discuss their options.
During the downturn, Wells Fargo stopped advertising home equity products, Kockos said. This month, the bank sent its customers a mailing about the products, she said.
Bank of America is including new advertisements in customers' mortgage statements and emails to potential borrowers.
"It's your equity," reads one Bank of America ad. "Make it work for you."
Big banks used to dominate the home-equity lending market, said Cecala of Inside Mortgage Finance. Credit unions and others have emerged as formidable competitors, he said. Many borrowers, meanwhile, are reluctant to take on more debt after going through the recession. Because of all that, lenders are offering deals.
"What I've seen is (lenders) offering them very low rates if they immediately draw down a balance on it," Cecala said. "They're also offering more flexibility" in terms.
Such deals might not always work. Mark Vitner, an economist for Wells Fargo, said banks are having a hard time getting wary consumers to borrow in general.
"Loan growth has been reviving over the last year," he said. "But loan growth has been pretty sluggish.
"One of the challenges in consumer lending is that consumers are still worried about their job and income prospects."
BEFORE YOU BORROW:
The Better Business Bureau offers the following tips for consumers considering borrowing against their home's equity:
_Find out whether your lender protects you against rising interest rates. Many home equity loans carry variable interest rates, which usually range from 1 to 3 percent above the banking industry's prime rate, Treasury bill rates or various indexes, which often change weekly.
_See whether your lender charges an inactivity fee. Borrowers who do not use their lines of credit within one year or other time period may be charged such a fee, which could be substantial.
_Consider how you would handle unexpected events. Heavily indebted homeowners could find themselves defaulting on their loans and losing their homes if they are faced with sudden financial instability. Borrowers should have a contingency plan.
For more Better Business Bureau tips on home equity lines of credit, go to www.bbb.org
Distributed by MCT Information Services