BANKERS SAY PEOPLE WHO BORROW AGAINST HOME EQUITY ARE THE CREDIT ELITE

If you’re one of the millions of Americans with a home equity credit line or a second mortgage loan, you are almost certainly among the nation’s credit elite.

A new study by the Consumer Bankers Association found that the average home equity borrower this year has a FICO credit score of 730, a household income of almost $90,000, a home worth $337,000, and an existing first mortgage of $169,000. The average new equity credit line taken out this year has been for $84,812, while the average home equity loan or second mortgage has been for $57,800.

Home equity borrowers typically have sound financial management purposes in mind when they tap their home equity, according to the study. Fully 53 percent of new equity loans this year have been for refinancing existing debt -- typically higher-cost consumer debt -- and 16 percent were intended primarily for major home improvements. Another 15 percent of borrowers said they took out equity loans to help purchase additional real estate -- a second or vacation home or investment property.

Equity loan borrowers tend to be older on average than the general population -- 73 percent were between 35 and 64 this past year -- but youthful equity-tappers are a growing segment of the market as well: Thirteen percent of new borrowers are homeowners between 20 and 34 years old.

Consumers with equity lines and loans are exceptionally disciplined in paying back the bank. Just 0.6 percent of equity loan borrowers and 0.76 percent of credit line customers were late on payments during the past year. Both rates are below prevailing delinquency rates for conventional first mortgages, and far below subprime delinquency rates on primary home loans.

But the performance of equity loan customers has begun to diverge sharply from the performance of equity credit line customers. Equity loan borrowers’ delinquency rate of 0.6 percent was down significantly from 0.92 percent in 2005 and 1.3 percent during 2004. Credit line borrowers, by contrast, are showing signs of rising delinquencies. Their 0.76 percent rate for 2006 was up dramatically -- by 73 percent -- from their rate of 0.44 percent in 2005 and 0.46 percent in 2004.

The likely cause: credit lines predominantly have carried floating rates tied to the Wall Street bank prime rate, which has risen steadily for nearly two years in the wake of the Federal Reserve Board’s ratcheting up of short-term rates. Credit line customers who took out lines at 4 percent during 2004 are now often paying 8.5 or 8.75 percent a month -- pushing them to search for alternatives.

As a result, the hottest trends among banks offering credit lines are various programs designed to convert portions -- or the entirety -- of floating-rate lines into fixed-rate lines or loans. For example, the Bank of America, Wells Fargo, Citicorp, and JPMorgan Chase all permit any of their credit line customers to convert portions of their outstanding balances to fixed-rate, usually at no cost.

Top executives of each of those banks say their new flexibility on credit lines is intended to discourage credit line borrowers from refinancing their first mortgage and “cashing out” enough additional money to pay off their rising-cost lines. A secondary purpose is to keep borrowers out of delinquency trouble.

“Even though these are some of our very best customers,” says Doreen Woo Ho, president of Wells Fargo Consumer Credit Group, “we have to be sensitive to their financial needs as (short-term) rates increase.”

Published: November 6, 2006

By Kenneth R. Harney
Realty Times