HELOCs Dwindling

Home-Equity Loans Winding Down(January 31, 2006) --

The popularity of home-equity loans and refinances is declining as the economy cools. Here’s the evidence:

Freddie Mac reports that as interest-rates rise, prime borrowers (those with the best credit) are taking out fewer cash-out refinances.The volume of cash-out refis from prime mortgages is expected to drop to $114.5 billion this year from a record $204 billion in 2005. This year’s expected level is similar to 2002 levels, according to Freddie Mac.

For the first time since mid-1999, the total volume of revolving home-equity lines of credit also dropped this past fall. The volume has remained steady in recent months around $436 billion, according to the Federal Reserve Board's Flow of Funds report, which tracks loans to both prime and subprime borrowers (those with tarnished credit).

The total amount consumers are borrowing nationally through lines of credit and home-equity loans will continue to increase, but the increase is expected to slow to 12 percent this year from 20 percent growth in 2005, according to SMR Research Corp.

What will the impact of these changes be? Merrill Lynch economist David Rosenberg recently estimated that serious declines in such borrowing could shave as much as 1 percent off the country's inflation-adjusted GDP this year.

Wells Fargo Senior Economist Scott Anderson says he estimates home-equity extractions, including capital gains home owners banked when they sold homes, have been adding about 0.5 percent to the country's GDP for several years now — or about $500 billion last year, which is equivalent to what people in the United States spend each year on cars and car parts.

Source: St. Paul Pioneer Press, Jennifer Bjorhus (01/29/06)