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. Percentages are based on numbers of loans or lines of credit. Data have been weighted to ensure the representativess of the sample. In this and subsequent tables, components may not sum to totals because of rounding.

(1.) Savings banks and savings loan associations.

(2.) Finance and loan companies, brokerage firms, mortgage companies, and individuals.

Source: Surveys of Consumers, 1998, 1993-94, and 1997.

Household surveys indicate some specialization among lenders in the type of home equity credit they supply. Consumer finance companies continue to be a significant source of traditional home equity loans while playing a much smaller role in the market for home equity lines of credit. Survey evidence indicates that finance companies account for about 25 percent of traditional home equity loans but only about 7 percent of the home equity line of credit market. More than 90 percent of homeowners with home equity lines of credit obtained them from depository institutions, most frequently commercial banks.

Several factors help explain the specialization among lending institutions. The larger role of finance companies in the traditional home equity loan market may in part reflect long-time customer relationships as well as limits on the services they provide. Because finance companies typically do not offer deposit services (except, in some cases, through affiliated depository institutions), they are less well suited to offering credit accounts that the borrower can draw down by check, a feature of virtually all home equity lines of credit. Also, finance companies tend to serve a somewhat younger clientele with relatively lower incomes and substantially smaller amounts of home equity.(7) Lenders often prefer to exercise tighter control over the credit use of such customers by granting them loans of specified amounts with predetermined payment schedules.

Although commercial banks are the predominant source of home equity lines of credit, not all banks offer this type of loan. As of September 1997, 53 percent of all U.S. commercial banks held outstanding balances on home, equity lines of credit (table 4). A much larger proportion, 81 percent, held traditional home equity loans.

4. Percentage of U.S. commercial banks with outstanding home equity credit, 1997, by type of credit

Assets of banks                       Lines of credit
(millions of dollars)

Less than 50                                 28
50-99                                        55
100-249                                      74
250-499                                      83
500-999                                      89
1,000 or more                                85

All banks                                    53

Memo
Lines of credit in use (percent)(1)          51

Assets of banks                       Traditional loans
(millions of dollars)

Less than 50                                 66
50-99                                        88
100-249                                      94
250-499                                      93
500-999                                      97
1,000 or more                                88

All banks                                    81

Memo
Lines of credit in use (percent)(1)          ...