The once-popular home equity line of credit is slowly dying because of fallout from the Great Recession.
A once-popular loan Americans use to finance home renovations and college tuition is slowly dying, slashing a lucrative source of revenue for the nation’s largest banks.
Record levels of home equity — spurred by soaring home prices and stagnant mortgage borrowing — haven’t prompted households to use a ready resource as a way to fund big-ticket purchases or home improvements. Finance executives have spent years researching the issue, commissioning surveys and studies to figure out how to jump-start a business that had always been a reliable and relatively low-risk source of earnings.
U.S. homeowners collectively had $6.3 trillion of housing equity they could borrow against as of June, according to analytics firm Black Knight Inc., more than double the $2.6 trillion total in 2009. That’s more expensive than the typical 30-year mortgage, an interest rate that generally tracks the yield on the 10-year Treasury note. The average rate on a new HELOC was 6.45% as of Sept. 30, according to Informa Financial Intelligence. Borrowers looking to exchange equity for cash in a refinancing are being offered an average rate of 3.99%.
Another obstacle: Borrowers who default on a HELOC, unlike on a personal loan, probably lose their homes. Banks are responding. Citizens Financial Group Inc. has reduced its processing times by half, to 35 days, according to Brendan Coughlin, head of consumer deposits at the Providence, R.I.-based bank. Bank of America will allow prospective borrowers to apply online, said Steve Boland, head of consumer lending.
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