No home equity crisis here
Stable local housing market allows region to escape lending cutbacks going on nationally
By Jonathan D. Epstein NEWS BUSINESS REPORTER
Updated: 07/13/08 7:12 AM
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- Elizabeth and Sam Buck, with daughter, Bella, took out a $20,000 home equity loan to help pay for an in-ground pool at their Wheatfield home.
Credit crisis? What crisis? Major lenders nationwide are drastically scaling back home equity lending, as falling home prices and rising mortgage losses spooked the industry.
They’re tightening up on who they’ll lend to and for how much, and even withdrawing offers or canceling credit lines.
But you’d never know it from living in Western New York.
Here, several banks and credit unions large and small are aggressively pushing home equity loans.
They’re touting their unusually low rates and introductory offers in marketing campaigns, and proclaiming eagerly that they’re open for business as usual, and seeking applications.
“We’ve got this campaign going with a great rate and we’ve got money to lend. That’s a home run,” said Richard
S. Gold, M&T Bank Corp.’s executive vice president of consumer lending. “We’re in the lending business, and happy to be so.”
Officials say the need is there, reflected by the strong demand lenders have seen. Applications were up 25 percent in the first quarter from a year ago at M&T, while overall volume is up 15 percent at First Niagara Financial Group, which just completed its annual spring campaign.
“It’s the best home equity campaign that we’ve had at First Niagara,” said J. Lanier Little, executive vice president of consumer banking at the Lockportbased savings bank.
And defaults and losses are low, as the credit quality for local banks is above current industry averages nationwide.
“It’s a relatively low-risk asset to put on our balance sheet,” said Peter G. Humphrey, CEO of Warsaw-based Financial Institutions, parent of Five Star Bank. “We think there’s good demand in the marketplace for these services.”
What makes Western New York different? Home values are still stable or even increasing, and borrowers are generally using home equity loans for home improvements and debt consolidation, not to buy more home than they can afford or go on costly vacations.
“If somebody’s getting a home equity loan, they’re probably fixing their roof. They’re not trying to stretch,” Gold said. “It’s amazing how when a product is used for what it’s intended, nobody gets hurt.”
Indeed, Elizabeth and Sam Buck are having fun because of their home equity loan. The Wheatfield couple took out a $20,000 loan from First Niagara in June to install an 17-foot-by- 25-foot oval in-ground pool earlier this month.
Elizabeth Buck, 37, is an 8th grade teacher at Lewiston-Porter Middle School, so she’s home for the summer with their 3-year-old daughter, Isabella, while her 36-year-old husband, Sam, works as an electrician.
But this isn’t something they’ve done purely on a whim. They’ve been talking for years about getting a pool, and had even saved more than $10,000 to cover the rest of the $27,000 cost, plus fencing and a patio. The loan is for 15 years, at 7 percent interest.
“We’ve always wanted one, and decided to go all out,” Elizabeth Buck said. “We are very careful. We’ve saved and this is just something we wanted to do.”
Long a staple of any bank’s basic product set, home equity loans and lines of credit — also called second mortgages — are designed to tap into the extra value in a home beyond the amount of the first mortgage. That extra is the “equity” a homeowner has built up from making payments toward the purchase of the home.
Borrowers can either take out a loan for a fixed amount, with fixed monthly payments, or set up a line of credit that they can access with checks as needed, sort of like a credit card. Rates can be either fixed or variable, and are comparable to a mortgage. The loan is backed by the home as collateral, so in case of default, the home is at risk.
But the interest payments are also tax-deductible, as with a mortgage, so consumers eagerly used them in recent years to pay for repairs, trips, education — even to cover the downpayment on new a house so borrowers wouldn’t have to pay for private mortgage insurance. In all, outstanding lines of credit doubled since 2002 to $1.1 trillion, according to congressional testimony in June by Comptroller of the Currency John C. Dugan.
“This is the time to be getting into these businesses. There’s still a demand and there’s going to be a demand for this product,” said Collyn Bement Gilbert, bank analyst at Stifel Nicolaus & Co.
At the same time, the loans are attractive to banks, which consider them a central part of a consumer relationship, along with mortgages, credit cards and checking accounts. Once a bank gets that business, it’s easier to cross-sell other products.
“With any product, as long as it’s underwritten properly, and you’re getting paid for the risk, it could generate a very good return,” said Albert H. Savastano, a bank analyst at Fox-Pitt, Kelton in New York.
Home equity loans and lines, like mortgages, have historically been reliable for banks, with relatively low losses of about 0.2 percent of all loans. But the national mortgage crisis and economic slowdown changed that.
Mortgage defaults and foreclosures soared across the country, and falling home values, heavy job losses, and soaring costs for gas and other goods mean borrowers are financially strapped. Millions of Americans may owe more on their house than the property is now worth.
So what was initially a mortgage problem for borrowers with bad credit has now spread to other loans, including credit cards and home equity. And those are secondary in repayment to mortgages, so banks often get stuck with them.
Nationwide, home equity losses shot up to 1.73 percent of all loans in the first quarter, or $2.4 billion, according to the OCC’s Dugan, the top regulator of nationally chartered banks. That’s a nine-fold increase from a year earlier, and the biggest lenders are expecting those losses to rise further this year, he said in an industry speech.
Also, 1.1 percent of all home equity lines of credit were more than 30 days late in payments in the first quarter — the highest level in more than 10 years, according to the American Bankers Association. About 2.34 percent of home equity loans were also delinquent.
As a result, many banks are sharply curtailing how much they will lend, with most also tightening credit standards. Some, such as JPMorgan, Bank of America, Citigroup, Wachovia and Wells Fargo, have even withdrawn loan offers, or have frozen or canceled lines of credit, leaving borrowers stuck.
Indeed, Elizabeth Buck said her pool contractor from Pacific Pools said he’s had other clients put downpayments on a pool and pick out liners, only to have the loans fall through. And the appraiser for her own loan even did a rare walk-through the house, taking measurements to assess the home value, instead of just a “drive-by.”
By contrast to the national market, credit quality is stable for local banks, as is the market. The region never had massive price appreciation, and didn’t experience the bust of other markets. “We don’t benefit from the elevator ride up, but when that elevator comes down, we don’t get squashed in the process,” Gold said.
Borrowers never had to stretch their finances to afford a home, so the banks were able to stick to traditional, simple products. And many Western New Yorkers have owned their homes for a long time, so they’ve built up plenty of equity, and aren’t using it for speculation.
“It’s partially the conservatism of borrowers as well as lenders,” Little said. “The average Buffalo home buyer doesn’t buy with the expectation that in a year or two they’ll be able to flip with a dramatically ramped up value.”
