Data suggests that many banks binged on home equity loans last year and began tightening standards only in the second half after housing prices had already staged a dramatic retreat.
Among the top 200 banks ranked by home equity holdings, 110 posted double-digit increases in their lines of credit and closed-end loans last year, according to data from SNL Financial in Charlottesville, Va. Home equity portfolios shrank at just 29 of these banks.
The combined volume of home equity loans outstanding for the top 200 banks jumped 25% last year, to $815 billion. For the 500 largest banks in this category, holdings increased by the same percentage, to $842 billion.
Among the largest banking companies, Citigroup Inc. appears to be the only one to have measurably backed off from offering home equity loans; its portfolio contracted 3.9%, to $67 billion.
"Last summer was when banks really began pulling back" on credit requirements, said Mark Fleming, the chief economist at First American CoreLogic Inc., a unit of First American Corp. of Santa Ana, Calif.
Because they stand behind first-lien mortgages to get paid, he said, home equity loans "will experience high loss severities, though the balances are generally smaller."
Acquisitions contributed to the sharp increases for some of the top lenders.
JPMorgan Chase & Co., which acquired the banking operations of Washington Mutual Inc., posted a 54.9% jump in home equity assets, to $131.4 billion, while Wells Fargo & Co., which absorbed Wachovia Corp., had a 53% increase, to $129.9 billion. Bank of America Corp. ranked as the largest home equity lender, with a 26.3% jump in outstandings, to $148 billion. (B of A purchased Countrywide Financial Corp., the largest residential lender, last year.)
The biggest increase came from No. 5-ranked PNC Financial Services Group Inc., which acquired National City Corp. of Cleveland last year. The Pittsburgh company posted a 203% jump in home equity loans, to $34.4 billion.
At least some of the increases in home equity portfolios could be explained by borrowers drawing down on their existing lines, rather than by lenders signing new customers.
Richard Musci, a vice president and chief marketing officer at the $28.4 billion-asset Charles Schwab Bank, said many lenders priced their home equity lines of credit at the prime rate or lower. "The effective rate is very low relative to other lending alternatives," encouraging usage, he said.
The Reno unit of Charles Schwab Corp. of San Francisco posted a 115.6% jump in home equity lending last year, to $2.7 billion. Musci said the surge was driven by a marketing campaign in late 2007 that offered loans "at a very attractive price point" a full percentage point below prime. "We added new HELOC accounts and saw an increase in existing account usage," he said.
Since then, the bank has tightened its credit requirements and raised prices. "There has been a pullback," Musci said.
Though many bankers claim to have tightened credit requirements in the past year, a Federal Reserve Board study released in May found that just over 40% of senior loan officers said they had cut the size of HELOCs offered to borrowers.
"There's no question that many home equity loans are upside down and hard to collect, and banks are going to have to charge them off," said Steven Brooks, an executive vice president and chief operating officer at Flagstar Bancorp Inc.'s $16.7 billion-asset thrift unit.
The Troy, Mich., lender "resisted" offering home equity loans until 2004, Brooks said.
"In hindsight, we should have done a lot less. If we had to do it over again, we would have written to extremely conservative credit guidelines."
Flagstar posted a 4.6% jump in home equity loans last year, to $702.7 million.
Brooks said he thinks many banks will be stuck with piggyback, or 80/20, second mortgages.
Many lenders relied heavily on such loans to help borrowers, who used the loans in lieu of the traditional 20% down payment, stretch to buy high-priced houses without private mortgage insurance, he said.
Fleming attributed the pervasive marketing of home equity loans to the fact that they were very profitable during the boom years, from 2003 to 2007.
Indeed, Musci at Charles Schwab said he still sees home equity loans as "a very balance-sheet-friendly product."
"It's a great-performing asset that has liquidity from a bank's perspective," he said.
Now, with roughly 20% of borrowers underwater on their mortgages, Fleming said, banks will have to start taking big chargeoffs in the next year or two, particularly for second liens.
Some large companies had the foresight to pull back sooner. Julie Rakes, a spokeswoman for the $118.2 billion-asset Capital One Financial Corp., said the McLean, Va., company "dialed back a lot of its lending, given the uncertain economic environment last year." Capital One's home equity lending fell 8.8% last year, to $2.2 billion.
Delinquency rates on home equity loans have jumped considerably since October, according to data from LoanPerformance, another First American unit. Sixty-day delinquencies on home equity lines rose to 4.06% in April, the most recent data available, from 2.55% a year earlier, and on closed-end loans the rate jumped to 5.24%, from 2.67% over the same period.
Don't expect to see similar portfolio growth this year.
"With housing values so unstable, it's difficult to do aggressive home equity lending because most borrowers have high loan-to-value ratios," said Dan Crockett, president and chief executive of Franklin American Mortgage Co., a privately held lender in Franklin, Tenn. "You're piling on debt on top of an asset that is depreciating, and even though qualifications are higher now, you're still eroding capital for the owner of the asset."
One unintended consequence of the tightening is that borrowers who relied on home equity loans to smooth out cash-flow shortfalls now have nowhere to turn.
"I'm sure that by pulling back, banks have increased the chances of many loans going into default," Fleming said. "They've basically removed one tool for households to manage and pay their debt obligations."
Production Plunges
Overall home mortgage production declined for the second consecutive year in 2008.
The combined volume for the top 100 residential lenders plummeted 37.6% last year, to $2.3 trillion, according to National Mortgage News, a SourceMedia Inc. publication. That followed a 21.6% drop in 2007.
Many of the top lenders were so focused on subprime and alternative-A loans that when those products dried up, they had to scramble to become certified in Federal Housing Administration lending.
"The drop in volume was due to the absolute exit of subprime and alt-A product," Crockett said. "Many lenders had built up their platforms, and it all went by the wayside overnight."
Five of the top 20 lenders that posted the biggest volume declines no longer exist, having failed or been sold. Only four of the top 20 Franklin American, U.S. Bancorp, BB&T Corp., and Flagstar posted volume increases from 2007.
Franklin American posted the biggest gain up 51.1% last year, to $18 billion largely because it maintained its focus on loans guaranteed by FHA, Crockett said.
The $139.3 billion-asset BB&T Corp. in Winston-Salem, N.C., had 21.3% jump in loan volume last year, to $19 billion.
Tim Dale, a senior vice president and mortgage loan servicing manager at BB&T, said lenders that sold subprime and alt-A loans to Wall Street ended up as the biggest losers because those products "simply went away."
