The Home Equity ATM Strikes Again

The Home Equity ATM Strikes Again

Home equity lines of credit (HELOCs) were conspicuously absent from the mortgage origination industry for more than five years, but they appear to be making a comeback according to recent reports by major lenders. JP Morgan Chase recently told CNBC that their HELOC origination business is up by more than 30 percent from the previous year, and credit reporting bureau Equifax has seen a 19 percent HELOC jump nationwide.

This increased HELOC origination is a good sign in terms of rising property prices. As more borrowers take out HELOCs on their homes, the U.S. consumer economy is bound to get a boost. This trend is bound to continue as more homeowners are seeing their properties appreciate in value; in fact, recent reports from analytics real estate firm CoreLogic indicate that 1.4 million homes across the U.S. climbed out of negative equity status in 2011.

The HELOC Menace

HELOCs were once staples of the home acquisition process, whereby mortgage applicants took out a conforming mortgage at 80 percent loan-to-value (LTV) and simultaneously close on a HELOC for the remaining 20 percent, thereby taking possession of the property at zero equity.

When they were not taken out to enable a home purchase above 80 percent LTV, HELOCs essentially turned properties into veritable ATMs that fueled a wave of relentless consumption among American homeowners. HELOCs are traditionally used for home improvement purposes with the hope that greater home equity can be obtained by tapping into existing equity. During the housing bubble frenzy prior to 2007, however, HELOCs were used to finance automobile purchases, Caribbean cruise vacations, home theater systems, and more. Some HELOC providers made it so easy for borrowers to access funds from their home equity that they even issued credit cards affiliated with the Visa and MasterCard networks.

Although HELOCs were not as bad as subprime mortgages in terms of inciting the bursting of the housing bubble, they were certainly responsible for inflating it. With some housing analysts already worried that real estate activity in the U.S. is showing bubble-like characteristics, HELOCs are thus far not setting off mass hysteria among consumers. A Wells Fargo executive told CNBC that the bank is monitoring HELOC usage and seeing that home improvement and education are the most common purposes.

According to Equifax, the current average value of an American HELOC is $90,000. In 2006, the median HELOC was more than $100,000. With median home prices on the rise across the U.S., increased HELOC activity is expected to continue. Should mortgage interest rates increase as well, borrowers are expected to turn to HELOCs instead of cashing out on refinances at higher rates.