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

(1.) Calculated by summing the outstanding balances under home equity lines of credit and dividing by that sum plus the amount of unused lines of credit available to account holders.

. . . Not applicable.

Source: Reports of Condition and Income, September 30, 1997.

Home equity lines of credit are more complex to administer than are traditional home equity loans; consequently, large banks are more likely than smaller banks to offer lines of credit. The vast majority of commercial banks with assets exceeding $250 million offered home equity lines of credit in 1997, whereas only 28 percent of those with assets of less than $50 million did so. The pattern is different for traditional home equity loans, with most banks at all asset levels offering such loans.

USERS AND USES OF HOME EQUITY CREDIT

As a group, homeowners with home equity credit have economic and demographic characteristics that set them apart from other homeowners. In general, home equity borrowers are relatively sophisticated and financially well off, although considerable diversity is found among them (see box "Consumer Knowledge and Satisfaction Regarding Home Equity Credit"). Moreover, important differences exist between holders of credit lines and users of traditional home equity loans. Differences among holders of each product--in their financial and demographic characteristics, in their uses of borrowed funds, and in their perceptions of the advantages of the two products-suggest that borrowers may not consider them to be close substitutes.

Characteristics of Holders of Home Equity Credit

Homeowners, who account for nearly two-thirds of all households, vary widely in their demographic characteristics and financial circumstances. Homeowners with no mortgage debt tend to be older individuals, in many cases retired; and, although they typically have relatively large amounts of home equity, they also tend to have lower incomes (table 5).

5. Characteristics of homeowners, by debt status, 1997

                                            Market value of
                          Proportion        home (dollars)
Homeowner                of homeowners
debt status                (percent)      Mean      Median

No mortgage debt               38         104,746    80,000
First mortgage only(4)         50         126,392   100,000
Home equity line
  of credit                     8         171,113   140,000
Traditional home
  equity loan                   5         166,508   110,000

Memo
All homeowners                100         124,324    98,000

                          Home equity(1)    1997 family income
                            (dollars)           (dollars)
Homeowner
debt status              Mean      Median    Mean      Median

No mortgage debt         104,746   80,000    38,364    27,500
First mortgage only(4)    57,749   43,000    54,282    47,500
Home equity line
  of credit              111,475   76,000    65,613    60,000
Traditional home
  equity loan             53,909   35,000    65,284    50,000

Memo
All homeowners            79,837   60,000    49,896    40,000

                                   Education(2)     Nonwhite
                         Age(2)      (median          and
Homeowner                (median      grade       Hispanic(3)
debt status              years)     completed      (percent)

No mortgage debt           67          12              10
First mortgage only(4)     42          14              14
Home equity line
  of credit                49          16               4
Traditional home
  equity loan              43          14               8

Memo
All homeowners             49          13              12