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Home equity loan balances fall again in Q4'15

Home equity loans and lines of credit declined on thebalance sheets of the nation's largest banks during the fourth quarter of 2015,as paydowns of equity lines and balances outpaced new originations.

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The final three months of 2015 marked the 28th consecutivequarter of declines in home equity loans and lines of credit in the bankingindustry. The aggregate balance among U.S. banks and thrifts dropped 1.5% to$533.14 billion as of Dec. 31, 2015, according to SNL Financial data.

Although HELOC originations have climbed gradually since2010, the recent surge in this line of business pales in comparison to the peaklevel of originations in 2004, according to Daren Blomquist, senior vicepresident at RealtyTrac.

"Even though people are regaining equity, you're notseeing as frenzied of behavior as you were 10 years ago where people wereleveraging their homes basically like an ATM machine," he added. "Certainlypeople got burned by doing that last time around. Also, the banks got burned inallowing that behavior to go on."

A rising interest rate environment could also be motivatingsome borrowers to pay off their HELOCs before their 10-year draw period endsand the loan becomes fully amortizing, Blomquist noted. If interest ratesincrease, he said the borrower could experience a "double whammy" interms of payment shock.

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The balance sheet decline was especially pronounced at the "BigFour" U.S. banks.

Wells Fargo& Co.'s home equity loans declined $1.85 billion from thelinked quarter — a trend that CFO John Shrewsberry said is likely to continue.

"[H]ome equity is sort of a going away business,because we've got a portfolio that's been shrinking for a long time,"Shrewsberry said of the bank's home equity line of business during an earningscall in January. "It's been improving in performance, and it just is notbeing added for a variety of reasons on a net basis. And that's unlikely tochange."

Blomquist said the nation's largest banks have the mostHELOCs originated during the "bubble era." Companies like have abalance of home equity loans associated with the large number of HELOCsapproaching their end-of-draw periods.

Mike Fratantoni, the Mortgage Bankers Association's chiefeconomist, made a similar point. "Large banks had been leading providersof HELOCs pre-crisis, so it is not surprising that they are seeing these trendsto an even greater extent," he said in an email.

Despite the relatively cautious approach to HELOCs on thepart of both borrowers and lenders, some banks are bolstering their HELOCmarketing efforts. For banks looking to lend beyond purchase and refinanceproducts, Blomquist said HELOCs are a relevant product for the growing marketof customers with home equity.

Cincinnati-based FifthThird Bancorp announced a home equity line of credit special onMarch 31. "That's actually pretty typical, to see spring promotions, butthere definitely seems to be an increase in overall marketing activity,"said Nancy Elkus, vice president and senior consumer lending product managerfor Fifth Third Bank."We recognize that there is more opportunity in the market for customers."

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Click here for a template that allows users to analyze loan and deposit composition at banks and thrifts.

Click here to access the U.S. Commercial Bank aggregate loans and leases page on SNL.com.