As Brian Skarda sees it in his role as head of residential lending for Union Savings Bank, things can happen to houses that make access to a home-equity line of credit worth the cost.
For borrowers, that cost is going up on the heels of the federal tax reform package enacted last month.
Under the Tax Cuts and Jobs Act enacted in December, homeowners can no longer deduct interest owed on home-equity loans if they use the money for purposes besides home renovations or the purchase of property.
With HEL rates typically lower than those for personal loans, in the past homeowners have leveraged the equity they have built up in their homes for all manner of major expenses, to include medical bills, paying off credit card debt, vehicle purchases and even vacations. Most banks also offer a HELOC allowing borrowers to tap funds as needed, rather than securing a loan at the time expenses crop up, whether planned or otherwise.
“A tree can come down, the boiler could go … things can happen in a heartbeat,” said Skarda, a senior vice president with Danbury, Connecticut-based Union Savings Bank. “It’s a nice comfort to have and well worth the annual cost.”
‘A Cheap and Convenient Way’
The federal tax change could limit the appeal of HELs for those purposes, however, depending on the competitiveness of rates for competing loans and the acumen of borrowers scouting their alternatives. The head of People’s United Financial said he is taking a wait-and-see attitude for now, with Bridgeport, Connecticut-based People’s United entering 2018 with momentum after posting earnings of $106.2 million in the fourth quarter, a 40 percent gain from a year earlier.
“The beauty of the home-equity product is its flexibility,” said People’s United Chief Executive Officer Jack Barnes, during a conference call last week with investment analysts. “You want to go buy a car, you want to pay a tuition bill? You write a check — you don’t have to go apply for the next loan. So the structure of home equity (loan) to the consumer, I think, is going to remain very attractive, and I would be very surprised if that changes.”
In advance of the new tax law, HELs were already declining in popularity with the customers of Connecticut-based banks. As reported to the Federal Deposit Insurance Corp. over 12 months through September, the state’s banks reported a $149 million decline in home equity loans, a 2.8 percent drop leaving the outstanding balance at just under $5.1 billion.
Similar trends were evident at national banks that are active in the Connecticut market, with Bank of America Corp. scaling back its U.S. home-equity lending by 12 percent in a year’s time, JPMorgan Chase & Co. ratcheting back 14 percent and Wells Fargo & Co. 16 percent. The CEO of Wells Fargo told investors last week that the decline in his company’s home-equity portfolio is being driven by people paying off loans they incurred prior to the 2008 financial panic, and that he expects home-equity lending to rebound in the coming years.
Citigroup Inc. is in growth mode already, with home-equity lending up 29 percent nationally over the trailing 12 months even as the New York-based company pulled back on overall mortgage lending 6 percent.
“There will be an impact from the tax reform, but I don’t see it enormously curtailing the demand for home equity products,” said Rick Muskus Jr., president of Stamford, Connecticut-based Patriot Bank. “They will continue to represent a cheap and convenient way to finance expenditures such as home improvements, boats and college. The tax deductibility has always been an added benefit. Consumers don’t have a lot of options to generate material liquidity other than tapping into a home equity line.”
‘Attitudes Change With the Rate’
The majority of borrowers use the money for home renovations and improvements, according to Kelly Kockos, a senior vice president and product management manager for home equity products at Wells Fargo Home Mortgage.
Before 2012, Wells Fargo saw more customers using home equity loans for “wants” but that’s changed post-recession, she said.
Kockos said Wells Fargo is reviewing the law to determine how it may affect their products; regardless, customers should consider more than just potential tax deduction opportunities when choosing an HEL.
“The main things to look for are not about tax deductibility, but look for a lender that has great features of a product that work for you,” Kockos said. “Does it have rate caps? Can you unlock and lock the interest rate? Look at that when you’re shopping around.”
Union Savings Bank’s Skarda said the demand for HELs will remain high as long as the prime interest rate remains low.
“A home equity line of credit is typically based on the prime rate, and prime has been so low for so long,” he said. “The attitudes change with the rate, the same as with any adjustable rate loan.”
Includes reporting by Macaela J. Bennett, Jordan Grice and Paul Schott.