Data shows that Home Equity Lines of Credit (HELOC) have gone down by more than 50 percent over the last ten years despite a housing market on the rise. At one time, the loans made up five percent of the entire market and have now dropped below two percent.
After the housing bubble burst, consumers have been less willing to tap into equity on their homes in order to have more cash. It is quite an interesting situation given the fact that buyers of cars can often agree to financing options at higher rates than they would receive if they utilized a HELOC. Only four percent of home owners have a HELOC now as opposed to ten percent a decade ago.
A HELOC is generally at a higher interest rate than an average 30-year mortgage but typically less than an average credit card interest rate. In theory, it should be a better alternative for a home owner than running up credit card debt. Borrowers looking to exchange equity for cash, however, will typically get a lower interest rate but would also have to go through more requirements to get one.
The change has definitely eaten into banks’ profits. Bank of America’s revenue is down almost seventy percent from interest charges on HELOCs compared to a decade ago. Certainly, one of the reasons for the decline is older home owners remember the bad days when the housing market went down and they struggled with more debt than they could handle.
However, banks also did not always hold up their end of the bargain for the customer. While it is in the fine print, banks usually reserve the right to take back the line of credit if the housing market changes. When the real estate bubble burst, people went to tap into their line of credit that was often sometimes sold to them as a rainy-day fund, only to find the bank had closed the access to the funds due to the market drop. The rainy day came and the funds were not there.
Experts also point to online competitors with short term loan offers with less paperwork eating into a former source of profit for banks of all sizes. In order to compete, banks will need to make the process easier and with a shorter time period, which will not be easy if the Line of Credit application continues to require an appraisal.
Also, at the height of the HELOC market, banks were more eager to lend money to home owners with less than perfect credit. It is a conundrum, as it does not make sense to lower standards, but speed to market seems to be winning the day for loans of this size and that is likely the only way banks can win the business back.