More American homeowners will be able to use their properties as
cash machines again after real estate equity jumped last year by the
most in 65 years.
Property owners recaptured $1.6
trillion as home values climbed to the highest levels since 2007. The
amount by which the value of the houses exceeds their underlying
mortgages rose to $8.2 trillion last year, a gain of 25 percent,
according to
Federal Reserve data.
An expanding group of homeowners is
able to get cash from their properties as banks show more willingness to
make home equity loans with the market’s recovery. Originations for
so-called junior, or second, mortgages should rise 10 percent to
almost $83 billion this year, from about $75 billion in 2012, said Shaun
Richardson, a vice president at Icon Advisory Group, a mortgage
analytics firm in
Greensboro,
North Carolina. About 6 percent of lenders eased equity-mortgage standards at the end of 2012, the most in 18 months, according to the Fed.
“Lenders are starting to come back into the marketplace,” said Greg McBride, a senior financial analyst at
Bankrate Inc.
“We’re not going back to the wild, Wild West we saw during the real
estate boom, but we are going to see more people spending their equity.”
Americans went on a spending spree in
the five years before the 2006 peak of the real estate market, tapping
about $800 billion of their rising equity to spend on everything from
cars and televisions to debt consolidation and
college tuition.
DECLARED WORTHLESS
At the beginning of the financial
crisis in 2008, close to $1 trillion of the loans were outstanding at
U.S. banks and credit unions, an all-time high, according to the Fed. In
the housing crash that followed, banks wrote off, or declared
worthless, about $251 billion of home equity loans, according to the
Federal Deposit Insurance Corp.
The year-old real estate recovery is
helping to ease defaults. The volume of equity loans 90 days or more
overdue dropped 25 percent in the fourth quarter to $3.2 billion from
the prior period, according to the
FDIC.
As a result, banks are beginning to view equity lending as a potential
source of income, rather than losses, said Stuart Feldstein, president
of SMR Research Corp., a consumer-lending research firm in Hackettstown,
New Jersey.
“This could be the year banks see the
home-equity business return to black ink, as long as defaults continue
to decline,” Feldstein said.
Home-equity mortgages held by banks
probably will yield a 0.2 percent return on assets this year, which is
the after-tax income on outstanding loans, Feldstein said. Improvements
in home prices and credit quality over the next two years should
put profit back to the pre-bust level of 1 percent to 1.5 percent return
on assets, he said.
BANKS RETAIN
JPMorgan Chase & Co.,
Bank of America Corp.,
Wells Fargo & Co. and
Citigroup Inc.,
the top four U.S. banks by assets, hold $319.6 billion of the loans,
about half of the outstanding balance of $652.6 billion, according to
the Federal Deposit Insurance Corp.
Bank of America has the most home-equity loans, at $102.6 billion.
Unlike first-lien mortgages, banks
retain most of their equity originations on their books. Only about 2
percent are securitized on the secondary market, said Feldstein. There
are two kinds of home-equity mortgages: lines of credit, known as
Helocs, and closed-end loans borrowed in lump sums.
Helocs are adjustable loans tied to
the prime rate, the interest charged by banks to their most creditworthy
customers, with the addition of a margin predetermined by the lender.
The national average prime rate has been 3.25 percent since the end
of 2008, as measured by Bloomberg.
AVERAGE RATES
The average rate for a Heloc last week was 5.11 percent, down from 5.22 percent a year ago, according to
Bankrate.com, an interest-rate aggregator in North Palm Beach, Florida. That puts the average margin at close to 2 percent.
Closed-end loans, sometimes called
He-loans, are usually fixed-rate junior mortgages. The average U.S. rate
for a closed- end loan was 6.13 percent last week, according to
Bankrate.
A year ago, the rate was 6.39 percent. Lenders usually
require borrowers to retain at least 20 percent equity, meaning the
junior mortgages added to the primary loan can’t exceed 80 percent of a
home’s value,
Bankrate’s McBride said.
About $6.5 trillion of residential
real estate value evaporated after a wave of mortgage defaults sparked
the 2008 financial crisis. The median U.S. home price hit bottom in 2012
after a 33 percent drop, as measured by the National Association
of Realtors. In February, the median price was up 12 percent from a year
earlier, the trade group said last week.
TAKE RISKS
“Owners who have been sitting in their
homes and watching their equity go up will be more likely to borrow and
to spend, and more likely to take risks like looking for another
house,” said Craig Focardi, senior research director at CEB
TowerGroup. “Having home equity is a financial cushion to the average
consumer’s personal balance sheet.”
A reviving real estate market added to
gross domestic product last year for the first time since 2005,
according to the Bureau of Economic Analysis in Washington. The economy
probably will grow at a 1.9 percent pace in 2013, the fourth year after
the end of the
recession, according to the median forecast of 83 economists surveyed by Bloomberg.
HOUSEHOLD SPENDING
Still, not everyone is spending. The
amount households have in bank deposits, savings bonds, fixed-income
mutual-funds and municipal securities increased $500 billion last year,
equaling the most since 2007, according to FTN Financial, based on
Fed data, while net household debt increased $10 billion, the least
since 2005.
“You might qualify for a home-equity
loan, but still have concerns about the economy or job security,” said
Icon Advisory’s Richardson. “Or, you might be in that large group of
people who need prices to come back a lot more before they qualify.”
Fed policymakers for four years have
driven down fixed home-loan rates by purchasing mortgage-backed bonds to
stimulate demand. Last week, the central bank said it would continue to
buy securities at a pace of $85 billion a month in their third round of
so-called quantitative easing.
At the end of 2012, the average rate
for a 30-year fixed primary mortgage fell to an all-time low of 3.3
percent, according to home-loan financier
Freddie Mac in McLean,
Virginia. Falling rates helped to boost home sales to 4.7 million last year, a gain of 8.4 percent from 2011.
“When we see some more history of
home-price stability and improving employment data, there will be more
people thinking about using their equity,” said Focardi, of CEB
TowerGroup. “Having equity gives a boost to confidence.”
source: newsday.com
