Consumers in Western New York and nationally are borrowing against the equity in their homes like it's going out of style as they take advantage of continued low rates and special promotions by banks.
Home equity lending has soared in recent months, as consumers still seeking to get more money out of their homes have switched from refinancing mortgages. That's because interest rates on mortgages have ticked up enough to eliminate any more benefit in refinancing for many people, but home equity loans and lines of credit are still a cheaper source of cash than borrowing on credit cards or other consumer options.
"Most consumers who were looking to refinance did so when mortgage rates hit rock botton," said Katherine A. Kaus, senior vice president of residential lending at Lake Shore Savings & Loan Association. "They are not interested in doing another refinance to get more funds because they will lose the low rate they are currently locked into."
Home equity products -- also known as second mortgages -- have been around for decades, but they've grown in popularity as home values continue rising -- 6.2 percent in the Buffalo market in the second quarter and 9 percent nationally.
At the same time, consumers have learned the benefits and flexibility of home equity loans and credit lines. They still use them for home improvement, but also to consolidate credit card and other debt at lower rates, pay for college, and to have cash for other needs.
Additionally, banks today often pay closing costs on home equity loans, saving the borrower money. And as with mortgages, the interest on home equity loans and lines is tax-deductible. It isn't on other loans.
But while beneficial for consumers, there's also a risk. Like mortgages, home equity loans and lines of credit are secured, or backed, by your home. That's great for banks, since they have a means of recouping their money in case of a loss. But for the borrower, you risk losing your home if you default, even if you're paying your first mortgage fully and it's only your second mortgage that's delinquent.
So even with a legitimate lender and a low-rate loan -- not a scam or "predatory" lender -- experts say consumers have to be cautious not to take out too much debt against their home. A single calamity -- such as a serious illness or loss of a job -- could put them over the edge, especially if they continue to rack up debt on credit cards.
"Home equity loans in and of themselves can be a good thing, because it can free up some of that equity to certainly give people more buying power," said Ann Aquilina, housing specialist at Consumer Credit Counseling Service of Buffalo. "But it can also be something that people can get really burned on. I've seen people with so many home equity loans on their property that they ended up either losing them or taking a loss when they sold it."
As the mortgage business has tailed off, banks and other finance companies have been aggressively hawking home equity products to customers through newspaper, television, radio and billboard advertisements, as well as statement stuffers, direct-mail offers with specific dollar amounts, and even post-it note ads on newspapers. They've even been pushed as alternatives to a mortgage.
Some banks like M&T Bank Corp. and KeyCorp's KeyBank have developed combination products that offer both a fixed-rate loan and a line of credit in one. And Bank of America Corp. last month introduced a no-fee home equity line of credit nationwide after a pilot program on the West Coast led to 50 percent more business there.
"It's gotten to be such a popular lending product that you just don't want to miss that opportunity. That's really the way people are borrowing today," said Gary Quenneville, senior vice president of retail banking for KeyBank in Western New York. "If you don't take advantage of that home equity business, you're going to miss a lot of the lending opportunities."
At Charter One Bank, a subsidiary of Citizens Financial Group of Rhode Island, home equity lending activity has already surpassed the bank's full-year plan for its Western New York region, which includes Buffalo, Rochester, Syracuse and Binghamton. The bank uses regular advertising and direct mail to promote its products.
"That demand has been there all year and continues to be," said Karen Bohn, Western New York retail director for Charter One. "Customers have found out that that's a good way to take advantage of the rates and get some extra available cash."
First Niagara Financial Group is winding up a highly successful eight-week home equity marketing campaign, its first such aggressive effort, said chief lending officer G. Gary Berner. The Lockport-based thrift pitted its Western, Central and Eastern New York regions against each other to see who could outdo the others in home equity lending.
The company has taken more applications in the first seven weeks of the campaign than it had in total home equity closings in the first 10 months of 2003, Berner said. And home equity lending is up 10 percent through the first nine months of 2004, to $237 million.
Bank executives are particularly happy with the popularity of their "biweekly" loan, with a half-payment every 14 days that allows a 15-year loan to be paid off in 13 years. It was introduced two years ago and 35 percent of the portfolio is now biweekly.
"The fact that that's the most popular product speaks well to the credit mindset of our borrowers," Berner said. "We have a conservative mentality in our population."
Low default rates
Overall, banks like home equity products because defaults tend to be lower than for credit card and other debt. Currently, just 2.5 percent of home equity loans and 0.38 percent of home equity lines are late in payment, compared to 4.33 percent of mortgages and credit card loans.
And while regulators say they still plan to monitor the rapid growth as a potential source of concern down the road, they don't expect to see any problems either. "Home equity lending has traditionally been very safe," said Mark Schmidt, acting deputy director for supervision at the Federal Deposit Insurance Corp., which regulates and insures banks. "We're watching it, but have not seen underwriting or credit quality issues."
The boom in home equity comes after several years of record mortgage lending as interest rates reached 45-year lows. Indeed, half of the more than $7 trillion in current mortgage debt was actually underwritten last year, much of it refinancing of older loans. And many borrowers used the opportunity to roll in other debt or to "cash-out" in some cases, getting a little extra money for other needs.
Refis are down
But refinancing has fallen sharply this year as rising rates have dampened consumer enthusiasm. According to the Mortgage Bankers Association, refinance applications now represent less than half of all loans, and will fall to 32 percent in 2005 and just 26 percent in 2006. And total mortgage originations are projected to fall to $1.9 trillion by 2006, nearly half of 2003's record.
Instead, while mortgages to buy homes continue to boom, consumers have turned to home equity lending for their other needs. And lenders who had ramped up their staff and operations for refinancing are happy to oblige because it gives them a replacement source of business.
"It's pretty logical," said Douglas G. Duncan, chief economist for the Mortgage Bankers. "A lot of people are not refinancing their first mortgage. They're simply taking a home equity loan or line of credit because rates are still pretty good."
Nationally, outstanding home equity loans and lines of credit rose to $629 billion at June 30, the most recent industrywide figures available. That's up 30 percent from a year earlier, according to SMR Research Corp., an industry research firm in Hackettstown, N.J.
The average size for a loan is $39,678, while lines of credit average $36,427 as of June 30, according to the Consumer Bankers Association.
Total equity loans outstanding from banks rose 10 percent both nationally and in New York state just in the three months from March to June, according to the FDIC. In Buffalo alone, the quarterly rate was 7.5 percent for small banks.
The expansion isn't new. Home equity lending has been growing an average of 18 percent a year for the last four years because of the low rates. But this year's increase is the biggest of the previous few years, according to SMR. And total outstanding home equity loans has nearly doubled from $332.3 billion at the end of 2000, the firm said.
Experts say there's room for more. There's currently about $7.1 trillion in total debt held against residential real estate today, but the property is worth about $15.7 trillion, said Wells Fargo & Co. Consumer Credit Group president Doreen Wo Hoo, citing Federal Reserve statistics in remarks to a recent Consumer Bankers conference.
That's not to say consumers will use all $8.6 trillion of their remaining equity. But "there's still plenty of room for home equity lending to move up," Duncan said.