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Banks Make Home-Equity Pitch
Ahead of Mortgage Boom's Bust
By RUTH SIMON
Staff Reporter of THE WALL STREET JOURNAL
Bracing for a slowdown in the mortgage boom, some of the nation's largest lenders are making a big push to boost their home-equity lending business.
The idea is to make home-equity loans much simpler to get so that homeowners have an incentive to keep borrowing even as refinancing becomes less attractive as interest rates rise. In some cases, homeowners are now being offered a two-fer -- get a mortgage and a home-equity line of a credit at the same time. Lenders are also trying to streamline the paperwork, preapproving some customers and even letting people apply online.
In October, Wells Fargo introduced a new loan that combines a first mortgage with a home-equity line of credit. A novel feature: The amount you can borrow automatically increases as you pay down the mortgage and the home's value grows.
J.P. Morgan Chase last year preapproved home-equity offers for more than one million customers and will increase the number of those offers in 2003. The New York-based lender is also putting its home-equity applications on the Web. And it plans to shift salespeople from mortgages to home-equity lending when refinance activity tails off. "Our goal is to make a home-equity loan as simple and easy to obtain as an auto loan," says Thomas Garvey, executive vice president.
The push comes at a time when rock-bottom rates are making home-equity loans an easy sell, anyway. Rates on home-equity lines of credit currently average just 4.96%, their lowest level ever, according to HSH Associates, financial publishers.
One result: The dollar value of home-equity loans and lines of credit should climb 20% to a record $1.3 trillion this year after surging 22% in 2002, says SMR Research, a market-research firm. Roughly one-quarter of homeowners with mortgages had a home-equity loan in 2001, up from 18% in 1999. By the end of this year, SMR expects that level to hit 27% of homeowners.
Continued growth in home-equity business is particularly important to lenders because of concerns that the two-year refinancing boom is fading. The Mortgage Bankers Association of America is forecasting that the dollar volume of mortgages will drop 28% this year from a record $2.5 trillion in 2002, as rising interest rates make homeowners less likely to refinance their mortgages.
With rates at rock-bottom levels, tapping home equity makes sense for many homeowners. Nonetheless, borrowers should keep in mind that if interest rates rise, their monthly payment will jump. Rates on home-equity lines are typically tied to the prime lending rate, which rises when the Federal Reserve raises rates. That means borrowing large amounts of money for long periods of time through a home-equity line can be risky. As recently as December 2000, the rate on the average home-equity line was more than 10%.
A line of credit is a good bet for borrowers who are financing home improvements that will be paid for in stages, or who plan to repay the loan within two or three years, says Greg McBride, a financial analyst with Bankrate.com (www.bankrate.com1), a consumer-finance Web site. That's because rates are low now, making a home-equity line a real bargain when compared with credit cards or most auto loans.
But borrowers need to pay close attention to fees. Some lenders charge small application fees on a line of credit and an annual fee, typically $50 to $75, to keep the line open. Borrowers who don't draw down their lines may face a "nonusage" fee, typically $50. Others who pay off the line within the first three years may be hit with an early-termination fee of $250 to $600.
Getting your mortgage and home-equity line from the same lender often makes sense. "Because you are a good customer, they may cut you a break on the rate or the fees," says Keith Gumbinger, a mortgage analyst at HSH Associates.
Still, it pays to shop around before you sign on the dotted line. Rates on home-equity lines can vary by as much as two percentage points. Fees and terms also vary greatly. If your lender offers a low "teaser" rate, be sure to find out how long the initial rate lasts and what the final rate will be after the teaser expires.
From the bank's point of view, home-equity lines of credit are both very safe and highly profitable. Nearly all carry floating interest rates, meaning the bank won't see their profits squeezed much if rates rise. And because banks pay so little for deposits these days, they have a dirt-cheap source of funds for home-equity loans. That means lenders can offer rates with enticingly low rates and still make a fat profit.
Interest in home-equity lending is so high that several lenders have asked the Mortgage Bankers Association to create a weekly survey of home-equity loan applications that would mirror the trade group's closely watched survey of mortgage-loan applications. At SMR, "we're getting more calls from our customers about home equity than about any other subject," says the firm's president, Stu Feldstein.
Lenders are betting that demand for home-equity lines will climb as rising mortgage rates make it less attractive for homeowners to refinance. Rates on 30-year mortgages tend to move in tandem with 10-year Treasurys, which react quickly to economic news. "Home-equity rates are likely to remain much lower than rates on first mortgages," says Doug Perry, a first vice president with Countrywide Home Loans, a unit of Countrywide Financial.
For now, lenders are focusing much of their efforts on selling more home-equity loans to existing customers. At Citigroup, mortgage brokers receive extra commissions if they can sell both loans at the same time. Roughly 30% of eligible mortgage customers bite at the offer, the bank says. Washington Mutual this year will roll out a program that automatically offers a home-equity line or loan to mortgage customers with good credit. When Wells Fargo opens up a new checking account or takes a mortgage application, it automatically checks to see if the customer would also qualify for a home-equity line or loan.
Chris Englin, an executive recruiter who lives near Seattle, took out a home-equity line from Wells Fargo when she refinanced her $200,000 mortgage in December. Ms. Englin says her loan officer suggested the credit line when she mentioned she needed cash to buy a half-interest in a 24-foot fishing boat. Taking out the home-equity line "was really easy," she says. "We did the whole thing by e-mail." |
