Home equity lending source of cash for homeowners, area of growth for brokers and lenders
By Shane Cleveland
VBJ Staff Reporter
Bubble or no bubble, the housing market is continuing at a strong pace. And it’s not just the builders, sellers and investors benefiting. Homeowners, even those who only recently entered the market, are realizing increased equity in their homes as values swell.
According to the National Association of Home Builders, the median sales price of existing single-family homes in the U.S. increased from $158,100 to $184,100 between 2002 and 2004. And with a 20 percent increase in home prices in Clark County just this year, homeowners that are staying put are finding ways to take advantage of their growing investment.
Cash creating tool
At a time when consumers are spending more than they are making – the U.S. Commerce Department reported American households consumed $59 billion more than they earned in July — housing has become a source for this cash flow.
Pacific Trust Lending’s Larry Carr said he saw a surge in refinancing two to three months ago.
"Many are doing it now before rates get too high to take advantage of their equity," said Carr. "It’s a tool to increase their discretionary income."
Many homeowners refinanced between 2001 and 2003 to take advantage of low mortgage rates. And while fewer may be refinancing today, more are tapping into their equity at the same time.
Mortgage finance company Freddie Mac reported that in the second quarter of 2005, 74 percent of its loans that were refinanced resulted in new mortgages with loan amounts that were at least five percent higher than the original mortgage balances, versus 64 percent in the first quarter. Total equity cashed out in the second quarter was estimated at $59 billion, versus $43 billion in the first quarter.
Of those that are refinancing, they are taking out a quarter to a third of their equity on average, or $25,000 to $30,000, said Carr. He said most draw cash to consolidate debt, but some are using it to start a business or take a vacation.
"If values continue to increase, and it looks like they will, then I expect homeowners to continue to tap into their equity," said Carr.
Columbia Credit Union Vice President of Direct Consumer Lending Bart Wescom said he has seen an increased demand in equity lending in the past couple years.
"The new Clark County tax assessments that reached many mailboxes last week have caused a spike in interest" said Wescom. "Members are very aware of their increased equity, and we’re seeing an increase in loan demand because of it."
Equity lending has proven to be an area of growing revenue for mortgage brokers and lenders. Depending on a client’s credit, Carr said borrowers at Pacific Trust Lending pay between a $500 fee or 1 percent to 3 percent of the loan amount.
Bank of Clark County Residential Lending Officer Stephanie Diaz said borrowers have the ability to buy-down their interest rate or pay higher interest and receive money towards paying for closing costs.
Columbia Credit Union grew its home equity portfolio 39.7 percent with $43 million in new loans funded in 2004. As of July, the credit union had $62.5 million in home equity loans, up 28.6 percent from the prior year. That compares to total residential loans of $132.7 million year-to-date, an increase of 20 percent.
Spending more, but wisely
Whether or not homeowners are cashing in, the increase in equity has boosted consumer confidence, too.
Kei Matsuda, Union Bank of California senior economist, said the housing market has had a positive impact on consumer confidence. And despite some concerns over the increasing amount of debt Americans are generating, he said consumers are choosing to use their equity wisely.
The majority are consolidating debt, such as credit cards, auto loans or second loans used in the purchase of their home. And while data shows that many borrowing against the equity in their homes are choosing to spend that money, Matsuda said they are pumping it back into their homes through improvements or into other investments, such as their childrens’ education.
"Even though (debt) has been going up I don’t share the view that people are spending recklessly," said Matsuda. "(Consumers) are behaving very logically and relatively conservatively when deciding what to do with home equity lending."
Matsuda expects interest rates to gradually climb and cool the still-hot housing market.
"Home equity lending will become more expensive and usage will drop," he said. "We are already seeing that."
Even a soft landing, as opposed to a bursting bubble, for the lofty housing market will negatively impact the economy, said Matsuda. With higher rates and a slower rate of appreciation, consumer confidence may decline, he said.