Home equity loans have been around for nearly a century, providing borrowers with a way to cover major expenses such as home repairs, medical bills and debt consolidation. Despite their long history, however, the popularity of these loans has risen and fallen over the past few decades. They have also evolved over the years to meet the needs of consumers looking for more flexible ways to borrow against their homes.
Here’s a look at the history of home equity loans, including their rise to prominence in the 1980s, their role in creating the Great Recession, and their sudden decline at the onset of the COVID-19 pandemic.
Key points to remember
- Home equity loans have been around since the Great Depression, although they were originally used primarily as a last resort for low-income borrowers with few other alternatives.
- The Tax Reform Act of 1986 helped inflame home loans, removing the tax deduction for interest paid on non-mortgage debt.
- Home equity loans continued to rise in the 1990s and early 2000s, with big banks launching big marketing campaigns that touted them as an easy way to turn your equity into cash.
- The Great Recession of 2008 put a damper on their use and the COVID-19 pandemic restricted access to them, but they still remain popular.
Originally for the less creditworthy
Home equity loans, which allow homeowners to turn their home’s equity into cash, have been around since the Great Depression, although they were relatively rare at first. Lenders were primarily consumer finance companies and second mortgage companies, with depository institutions accounting for only about two-fifths of loans made. Economic conditions put many homeowners, especially farmers, at risk of foreclosure, and with sources of credit hard to come by, loans began as a way to avert disaster.
For example, if a customer owned a home worth $100,000 and only owed $50,000 on their first mortgage, a lender might allow them to take out an additional $25,000 in the form of a home equity loan. . Alas, that second mortgage rarely helped in the long run as the depression deepened and many people lost their properties. As a result, home equity loans were equated with poverty and carried a social stigma.
Going mainstream in the 1970s and 1980s
This began to change in the 1970s and 1980s. A number of factors contributed to their explosion during those decades, including the fact that more deposit-taking institutions, including big-name banks, decided to market.
Banks had some advantages over finance companies, including the ability to offer home equity lines of credit (HELOCs) that consumers could access by writing a check. Suddenly, homeowners had the flexibility to borrow just the amount they needed, when they needed it, rather than taking out a lump sum loan. Deposit-taking institutions also tended to have an older customer base than financial companies, with more capital to draw on.
The popularity of these loans only increased with the passage of the Tax Reform Act of 1986, which removed the tax deduction for interest paid on non-mortgage debt. This, combined with relatively low interest rates, made home equity loans much more attractive than unsecured loans, which you could no longer write off on your tax return. As a result, the sector has grown at a staggering rate. The total value of outstanding equity loans rose from $1 billion in 1982 to $188 billion in 1988.
Marketed to the masses by major banks
The Tax Act of 1986, however, was not the only force behind the explosion of home equity loans. Around the same time, the big banks were undertaking a concerted effort to change the image of second mortgages, once considered a last resort for people in financial difficulty.
One of the first things banks did was change their advertising terminology. Pei-Yuan Chia, a former Citicorp vice chairman who oversaw the bank’s consumer business in the 1980s and 1990s, said The New York Times in a 2008 interview: “Calling it a ‘second mortgage’ is like ransacking your house, but calling it ‘equity access’ and it sounds more innocent.” Citigroup launched a campaign in the early 2000s urging homeowners to “live richly.” Banco Popular had a “Make Dreams Happen” ad campaign that used the slogan “Need Cash? Use your home. »
“The bank began to use consumer advertising techniques more like a department store than a bank,” Barbara Lippert of Advertising week Told The New York Times in 2008. “It was a real change of direction.” What these marketing campaigns typically leave out are the dangers that come with these loans, including the risk of foreclosure for borrowers who might not be able to repay them.
Playing a part in the Great Recession
The home equity loan market continued to grow until 2005, when the value of new HELOCs reached nearly $364 billion. At that time, market growth was fueled largely by a lowering of credit standards, which meant that even customers with lower FICO scores or high debt-to-income ratios (DTIs) could often be approved.
All of that changed over the next two years, which saw a dramatic drop in home values and a corresponding increase in mortgage defaults, spawning the Great Recession. As a result, loan originations fell dramatically, while banks tightened their lending guidelines. As the housing market slowly recovered, equity lending began to pick up, but not at the pace seen during the 2005 peak.
COVID-19 slows recovery
Home equity lending fell again at the onset of the COVID-19 pandemic, with banks such as JPMorgan Chase suspending HELOC originations on April 16, 2020 due to economic uncertainty and a tumultuous labor market. Citigroup followed suit nearly a year later on March 3, 2021.
Even with the job market recovering and Americans sitting on a record amount of real estate equity — $9.9 trillion at the end of 2021, according to data firm Black Knight — these two big banks have yet to pick up new equity loans. Bank of America, however, continued to offer HELOCs, including a hybrid model with a fixed interest rate that can mimic a home equity loan. According to the report of The Wall Street Journalit initially implemented stricter lending standards to mitigate credit risk, but has since reverted to its previous underwriting policies.
The absence of several major banks from the market, however, has not prevented home equity lending from making a comeback in 2021. The prospect of continued interest rate increases has made lower cost home loans more attractive, leading to substantial growth in home equity loans and new HELOCs.
How long have home equity loans been around?
Advertisements for home equity loans date back at least to the Great Depression. At the time, they were relatively rare and generally used by owners with no other means of repaying their debts. Their popularity increased in the 1970s and 1980s when major banks began offering them and Congress passed legislation phasing out the tax deduction for other types of interest payments.
Who were the first companies to offer home equity loans?
For much of the 20th century, most home equity loans were primarily made by consumer finance companies, second mortgage companies, and even individuals. In the 1970s, however, more traditional banks began to add these products. As deposit-taking institutions, they could offer equity-based lines of credit that consumers could access by writing a cheque.
How did the Tax Reform Act of 1986 affect home equity loans?
Among other provisions, the Tax Reform Act of 1986 removed the tax deduction for interest paid on non-mortgage debt. This has made home equity loans a more attractive alternative to other loans.
Home equity loans have been around for nearly a century, although the industry only really took off in the 1980s after banks began to reshape the image of these loans, followed by the Congress passed legislation that made them more attractive than other forms of lending. loan. The Great Recession and the COVID-19 pandemic both put a damper on their use, but to this day, home equity loans remain an extremely popular vehicle for borrowing money.