Rising Home Values Are Nudging More Chicago-Area Homeowners to Tap the Equity in Their Homes via Lines of Credit

There appears to be an increase in consumer debt that is reminiscent of the near-collapse of 2008-2010. A recent article in Crain's Chicago Business (reprinted below), reports that consumers are using increases in home equity to secure further borrowing and spending. Whether the increase in borrowing secured by second liens on homes will backfire and lead to a crisis like the one that started in 2008, remains to be seen, but the trends do indicate that consumer debt is rising, which makes consumers vulnerable to unforeseen events, such as job loss or income reduction.

Reprinted from Crain's Chicago Business.

In the first quarter of 2018, about 22 percent of home loans in the Chicago area were home equity lines of credit, according to Attom Data Solutions, a property information firm based in Irvine, Calif. That is, more than one of every five home loans issued was a home equity line.

It was the first time the figure was over 20 percent since the last quarter of 2008.

For most of the time between those dates, home equity loans were 15 percent or less of Chicago-area home loans, and for a stretch of three years, they stayed below 10 percent.

A home equity line of credit does not entail refinancing an existing mortgage, but attaches borrowing power to the equity homeowners have. It is, essentially, a credit card backed by the homeowners' stake in their house.

In a metropolitan area with the nation's largest number of homeowners who are underwater on their mortgage, the good news in the rise of home equity lines of credit is that there are large numbers of homeowners who have sufficient equity to borrow against it.

"Prices have really rebounded in my neighborhood," said Raminder Chadha, who last week took out a line of credit on the North Center home he owns with his wife, Nabeelah. "I thought it was time to get a cushion ready" in case of coming spikes in property taxes or other home-related expenses, he said, so when his debt on the house dropped to 70 percent of its value, he took out a line of credit for about 7 percent, still staying within the recommended 80-percent debt threshold.

This sort of borrowing can turn into a cash infusion into the local economy, Daren Blomquist, senior vice president at Attom, said in an email. "(Home equity lines) used properly can be good for the wider economy, as they will help put the housing wealth to work in the economy," Blomquist wrote, "particularly in the home improvement and construction sectors, while also helping to add value back into homes."

While abuse of home equity lines of credit may have contributed to the housing bust—some homeowners tapped equity for items unrelated to the homes' value, such as travel, boats or weddings—Blomquist points out that under the new tax structure unveiled in 2017, interest paid on loans used for anything other than home improvements is not tax-deductible.

That should reduce the appeal for people who would "treat their home as an ATM machine," he wrote, and mostly limit the use of the loans to fixing up homes.

Across the country, home equity loans were 19.2 percent of all home loans during the first quarter, Attom reported. Among the nation's 10 largest cities, Chicago had one of the largest shares of loans that were home equity, after Philadelphia (26.2 percent of loans during the quarter) and Boston (26.1 percent).

One reason for the increase—and for potential future growth in home equity loans' popularity—may be that such loans could be the more cost-effective way of two primary tools homeowners have for spending equity, said a BMO Harris Bank executive. Interest rates on mortgages are rising, said Paul Dilda, head of retail strategy, products and segments for BMO Harris, so "home equity borrowing is likely to increase as borrowers will prefer to tap the equity in their homes rather than refinance their low-rate mortgages" to get at the equity.

While the number of Chicago-area borrowers who took out home equity loans is rising, it's not rising as fast as the national figure, possibly the result of our slower-than-average recovery leaving many homeowners still underwater with no equity to tap. About 11,280 Chicago-area homeowners took out the loans in first-quarter 2018, according to Attom, up 7 percent from the year-earlier figure. Nationally, the number of such borrowers increased 14 percent in the same period.

In the fourth quarter of 2008, the last time home equity loans' share was over 20 percent, Chicago homeowners took out a little more than 12,500 such loans, or 22 percent of the roughly 57,400 home loans issued.

At 22.5 percent, the first-quarter 2018 share of Chicago loans that were home equity is approaching the equity-rich mid-2000s, when the loans were often more than 25 percent of total loans.

But in raw numbers, there's no comparison. In the first quarter of 2006, Chicagoans took out 38,570 home equity loans, 26 percent of the 147,900 mortgages issued in the region that quarter, according to Attom. Both the number of these loans and the number of all mortgages in that quarter were about three times the number issued in the first quarter of this year.