Home equity lines of credit (HELOCs) were staples of the home lending industry during the real estate and mortgage frenzy of the early 21st century. They were also among the first casualties of the housing market downturn; by 2006, it was difficult to find a mortgage lender in the United States willing to extend a revolving line of credit based on residential equity. By 2008, home equity loans were virtually a relic of good times gone by.
Now that the American housing market seems to be on the right track to economic recovery, HELOCs are starting to be offered once again. According to credit ratings and research firm Moody’s, the lending rate of HELOCs in the U.S. has gone up 30 percent in 2012. HELOC lending is poised to go up a few notches in 2013, to the tune of $104 billion.
A Boost for Consumer Spending
The halcyon days of HELOC lending, from 2005 to 2007, were underscored by the frenzied home improvement and household spending of the time. HELOCs are essentially revolving lines of credit, and at the height of the housing bubble borrowers were even presented with MasterCard and Visa charge cards, ready for purchases at Home Depot, Lowe’s, Bed Bath and Beyond, Best Buy, and other retailers that fueled strong consumer spending.
The current upswing in HELOC lending is also boosting consumer spending and the American economy. The current rate of consumer spending is at two percent and rising. HELOC funding increases as home prices go up, and according to the Mortgage Bankers Association homes will have appreciated eight percent by the end of 2012.
Writing Off Old HELOCs
Major lenders like Bank of America and Wells Fargo are still dealing with the aftermath of the housing crisis with regard to HELOCs. Since home equity loans are subordinated liens in a residential property title, lenders take on even greater risk when they keep these products in their portfolios. According to recent figures released by the Federal Reserve, lenders wrote off about $4.5 billion in defaulted HELOCs from July to September of 2012.
As banks continue to write off the bad HELOCs extended during the American housing bonanza of the previous decade, they are looking forward to the next wave of home equity lending. Most HELOCs are used for home improvements, which in return add value to the subject property and ease the risk taken on by the lender.