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• W82529335 abstract "Aside from the healthy profits they generate, they can be used as an origination hedge The days have long passed when only finance companies loaned money to consumers based on the equity in their homes. more and more traditional banks are discovering a largely untapped river of equity capital that a strong economy has made even more bountiful. Many believe their income from home equity sales could soon rival the credit card bonanza of the last two decades. Perhaps most importantly, the rise of home equity lending will give many lenders a way to hedge against downturns in mortgage originations. Just as companies use derivative instruments as hedges against fiscal loss and multinational corporations use one subsidiary to guard against a potential loss in another, banks can use home equity lending to offset a poor mortgage market. Banks traditionally keep their mortgage departments separate from home equity lending, often putting them in competition with each other. some banks are changing that scenario. Finally realizing the importance of cross-selling, they are combining mortgage and equity lending and giving these new divisions new prominence. Executives in charge of these divisions have gained more status. Citibank, for example, recently promoted Robert Lipp to the position of vice-chairman of global consumer business. His new duties put him in charge of cross-selling mortgage and home equity products and he reports directly to the bank chairman. Trends like these and many more are articulated in the new report, Equity Lending. Published by the American Bankers Association, it gives bankers detailed information on the home equity lending functions of commercial and savings banks, including home equity lines of credit (HELOCs) and closed-end home equity loans (HELs). It was designed to provide home equity product managers with trend information and peer group data that are essential for program evaluation and business development. The ABA survey reports which banks are profiting most from home equity lending, deals with risk management alternatives, and describes trends in home equity asset-backed securities. The report provides plenty of evidence to legitimize any bank's decision to move into home equity lending. It shows that the banking industry's return on assets (ROA) for both HELOCs and HELs was higher in 1998 than in 1997. In 1998, line-of-credit ROA was 1.69%, while for loans it was 1.76%. Service costs were higher on the credit lines, the report noted, and of course the lines are not always used. Moreover, delinquencies were down for both HELOCs and HELs, and charge-offs were modest and virtually unchanged from 1997 levels. Furthermore, the survey says large HELOC and HEL portfolio banks are more profitable than small portfolio banks. A combination of factors recently combined to erode home equity line growth. Home equity loans are currently leading lines in the competition for the home equity dollar. Total HELs outstanding are four times as large as HELOCs and growing at a faster rate. In 1998, total HELs outstanding were up 17.3% from 1997 while HELOCs grew just 4.6%. Weakness in HELOC growth resulted partly from the large number of mortgage refinancings that occurred when interest rates were low. (People often cash out some of their equity when refinancing.) Rising interest rates are currently countering this effect. While the home equity market usually doesn't move that much, it was very much impacted by the refi binge of 1998 and 1999, when nearly $800 billion in homes were refinanced, says David Olson of David Olson Research Company, who wrote the report based on ABA findings. He says HELOC growth has always slowed during refinance booms because HELOCs were not reinstated when first mortgages were refinanced. Now banks are learning to reinstate lines of credit without cost after refinancings, he says. Another impediment to home equity sales has been competition between mortgage and equity lending. …" @default.
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• W82529335 date "2000-09-01" @default.
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• W82529335 title "Banks Find New Uses for Home Equity Loans" @default.
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