Saturday, February 15, 2014

American banks pushing home equity loans to seniors

Bankers are becoming eager to bump up sluggish revenue growth and are therefore once more returning to a business model that lost much of its appeal during the 2007 - 2009 financial crisis: home equity loans.

If you don't what that is, basically it is a reverse mortgage wherein you bargain the value of your home (which has already been fully paid for) and reverse refinance it so you gain money back from the value of your home - essentially selling the bank part of your house, so that when you later sell it (or you die and it gets sold) then the bank collects on the debt after you die.

Thus if you are watching TV, an American channel, you will likely start noticing these ads for reverse mortgages / home equity loans.

The problem during the 2007-2009 subprime lending crisis was that home prices dropped so rapidly that banks were losing money on the value of the homes they had bought into.

New home equity loans reached a record of $430 billion in 2006. Banks made record profits during that time period on home equity lending as home prices soared, but many property owners treated their property value as a personal ATM and spent the money on luxuries they didn't need. As the housing market turned sour, 30% of home equity in the country was destroyed - and with that the banking industry lost billions.

During 2010 and 2011 the banks began offering home equity loans again, but they weren't really pushing them because the market was considered to be too soft and there wasn't enough profit to be made at the time.

But starting in 2012 the USA has recovered from the financial crisis completely and American consumers are now receiving pitches in their mail boxes, email, and brochures in bank branches. Bankers admit the competition is increasing rapidly and they are all trying to capture customers with more flexible terms and lock them into reverse mortgages.

This spells more profits for banks in the long run - so long as home prices in the USA remain stable.

Which, judging by the median new home prices, is happening.

As the USA economic pictures continues to brighten the banks are relaxing their standards for who they are willing to loan money to - and home equity loans to seniors who already have their homes fully paid for is considered a pretty safe bet that can only be affected if the value of someone's home drops.

It isn't just homes being offered reverse mortgages either. Businesses are being offered the same deal for their commercial real estate - pushing the idea that if you own the land, why not cash in on its value NOW instead of later?

According to the U.S. Office of the Comptroller of the Currency survey of 86 of the largest banks in the USA as well as federal savings associations (the survey was conducted between Jan 1st 2012 and ended on June 30th, 2013) it showed a dramatic increase during that 18 month time period of home equity loans. The survey represented 87% of total loans in the system, with 11 categories of commercial lending addressed and 7 categories of retail products, including conventional and high loan-to-value (LTV) home equity products.

Which means banks are again increasing their appetite for risk, which means they are also easing their standards on credit cards, asset-based lending, and more.

High LTV home equity loans saw the most tightening of standards during the 2007 to 2011 period. In 2012, standards were eased at 17% of financial institutions. Many banks however tightened their standards, but are now pushing home equity lending because they are trying to cash in on those people who fit the standards - and thus still make some good money off those people.

Banks say they are being more cautious about home equity loans and are ensuring customers can afford the loan, but they are also covering their assets to make sure they make money off these people.

The push to increase revenue comes as banks are facing increasing pressure from investors to grow revenue, which has declined along with the mortgage refinance business. When mortgage rates spiked in 2013, demand for mortgage refinance loans dried up, and this cost the big banks millions in potential income.

Today banks are pushing the idea that they don't want to lend to people who just have equity - they also want the person to have a strong credit score above 700, and a sufficient income / stockpile of cash to fulfill their new standards.

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