Recent developments in home equity lending - includes related articles on consumer satisfaction survey and estimate of aggregate debt

Federal Reserve Bulletin, April, 1998 by Glenn B. Canner, Thomas A. Durkin, Charles A. Luckett

Note. Data have been weighted to ensure the representativeness of the sample. Between 1988 (the first year for which the data are available) and 1997, fewer than 1/2 percent of homeowners had both types of home equity credit.

n.a. Not available.

Source: 1977 Consumer Credit Survey; 1983 Survey of Consumer Finances; Surveys of Consumers, 1998, 1993-94, and 1997.

The proportion of homeowners with home equity loans continued to grow after 1988, reaching 13 percent in 1993-94. The 1997 survey indicated little further change in this proportion, but because of increases in both the rate of homeownership and the number of households, the number of households with a home equity loan increased about 10 percent from 1993-94 to 1997.

In contrast to the pattern of account holding observed in 1988, both the 1993-94 and 1997 surveys found that home equity lines of credit were more prevalent (8 percent of homeowners had them in 1997) than traditional home equity loans (5 percent of homeowners). Taken together, roughly 9 million households had home equity loans in 1997.

The 1990s have seen several periods of extensive refinancing activity, particularly in 1992 and 1993. During those years, when interest rates on home mortgages fell substantially, millions of homeowners took advantage of the lower rates; in the process of refinancing their first mortgage, some rolled the outstanding balances on their home equity loans into the new loan. As a consequence, the proportions of homeowners with home equity loans found in the 1993-94 and 1997 surveys were likely smaller than they would have been otherwise.

A second factor that has likely held down the proportion of households with home equity loans in recent years has been an increase in the share of home purchase loans with high loan-to-value ratios (LTVs)--loans in which the amount borrowed is more than 90 percent of the appraised value of the property. Between 1989 and 1996, the proportion of conventional mortgages with high LTVs more than tripled, from 7 percent to 25 percent.(5) An increasing incidence of home purchase loans with high LTVs means relatively more homeowners have little home equity available to support home equity borrowing.

SOURCES OF HOME EQUITY LOANS

Many types of financial institutions extend home equity loans. Before the mid-1970s, home equity loans were most frequently supplied by consumer finance companies, second mortgage companies, and individuals. Depository institutions-commercial banks, savings banks, savings and loan associations, and credit unions-were the source of only about two-fifths of these loans.(6) Today, commercial banks are the primary source of home equity loans, although the other types of depositories as well as finance companies have significant market shares (table 3).

3. Home equity loans, grouped by type and distributed by source, selected years, 1988-97

                                        1988
Source                    Lines of credit   Traditional loans

Commercial banks                 54                33
Savings institutions(1)          31                27
Credit unions                    11                 8
Other creditors(2)                4                32

Total                           100               100

                                       1993-94
Source                    Lines of credit   Traditional loans

Commercial banks                 60                29
Savings institutions(1)          21                30
Credit unions                    13                11
Other creditors(2)                7                29

Total                           100               100

                                         1997
Source                    Lines of credit   Traditional loans

Commercial banks                 61                44
Savings institutions(1)          16                20
Credit unions                    16                13
Other creditors(2)                7                24

Total                           100               100