Home equity lending: evidence from recent surveys.

Accumulated equity in homes is one of the largest components of the wealth of U.S. households. Home equity differs from many other assets in that it cannot be readily used to purchase goods or services or to repay debt. It is widely accepted as collateral, however, and in recent years homeowners have raised substantial amounts of spendable funds by borrowing against the equity in their homes.

Homeowners can convert their home equity to a liquid form in several ways: by selling a home and either purchasing a lower-priced home or renting, by refinancing an existing mortgage for an amount greater than the outstanding mortgage balance plus closing costs, or by obtaining home equity credit.

Home equity credit takes either of two forms. One form, referred to here as a "traditional home equity loan," is a closed-end loan extended for a specific period that generally requires repayment of interest and principal in equal monthly installments. Such a loan typically has an interest rate that is fixed for the life of the loan. The other form, a "home equity line of credit," is a revolving account that permits borrowing from time to time, at the homeowner's discretion, up to the amount of the credit line; it typically has a more flexible repayment schedule than a traditional home equity loan. Most home equity credit lines have a variable interest rate that is pegged to an index such as the prime rate. Substantial equity in homes, aggressive competition among financial institutions, and revisions of the tax code all have contributed to the increased use of home equity credit.

Over the past few years, considerable information about home equity lending has become available through surveys of households and lending institutions. The Federal Reserve Board, for instance, periodically surveys households about their home equity borrowing. The regulatory agencies have for several years collected data from commercial banks on amounts outstanding under home equity lines of credit, via quarterly Reports of Condition and Income (frequently referred to as Call Reports). The agencies recently began collecting information about outstanding balances under traditional home equity loans as well.

To learn more about the current status of home equity lending, the Federal Reserve Board participated in a special nationwide survey of households conducted over the period November 1993 through March 1994. Results of this recent survey give a picture of current household borrowing activity and, together with results of earlier surveys, provide a means of measuring changes in consumer behavior.(1) This article presents results from the recent household survey and data obtained from other sources of information on home equity lending.

HOLDINGS OF HOME EQUITY LOANS

Growth of home equity credit, and of home equity lines of credit in particular, gained momentum in the mid-1980s with a boost from the Tax Reform Act of 1986, which mandated the phaseout of federal income tax deductions for interest paid on nonmortgage consumer debt. This change in tax law enhanced the attractiveness of using debt secured by homes to fund expenditures that consumers previously had typically financed by consumer credit: Almost one-third of the homeowners in the 1993-94 household survey who reported having home equity credit cited its favorable tax treatment as an advantage over other types of credit (table 1). Attractive interest rates on home equity credit relative to rates on most other types of consumer credit, as well as aggressive marketing and price competition among creditors, have further encouraged consumer interest in home equity credit.

1. Percentage of home equity credit users citing
advantages of home equity credit over other types
of credit
                                   Home equity   Traditional
       Advantage                     line of       home
                                     credit        equity loan
Low interest rate                     35              51
Easy to get                           21              32
Tax advantage                         31              28
Convenient(1)                         57               5
Can defer repayment of principal       7               *
Other(2)                               5              26
Note: Data have been weighted to ensure the representatives of the
sample. Percentage sum to more than 100 percent because respondents were
allowed to cite up to two advantages for each tupe of credit.
(*) Less than 0.5 percent.
(1.) Includes immediate access to funds and other responses indicating that
convenience was an advantage.
(2.) Includes ability to borrow a large amount, absence of closing costs,
ability to consolidate debts, and miscellaneous other responses.
Source: 1993-94 Surveys of Consumers.

Before the mid-1980s, nearly all home equity debt was of the traditional type. Since that time, growing numbers of homeowners have preferred lines of credit as the means of borrowing on their home equity. Although relatively low interest rates and tax deductibility characterize both types of home equity borrowing, the convenience of being able to draw against a line of credit as needed has proved to be a particularly attractive feature of credit lines and undoubtedly has spurred their relative growth.

In 1977, 5.4 percent of homeowners had home equity debt (table 2). By 1983, the proportion had risen only slightly, to 6.8 percent. By the second half of 1988, however, 11.0 percent of homeowning households, roughly 6.5 million in number, had debt secured by home equity; about equal proportions had home equity lines of credit and traditional home equity loans. The most recent survey indicates that 12.9 percent of all homeowners, or about 8.2 million households, have home equity debt: 8.3 percent have a home equity line of credit and 4.9 percent have a traditional home equity loan (a small proportion of households have both forms).

Although the use of home equity credit, as reported in the two most recent household surveys, was greater in 1993 than in 1988, the extraordinary volume of mortgage refinancing in the past three years or so has no doubt curtailed its growth. Since the 1988 survey, interest rates on home mortgages have fallen substantially (particularly between mid-1990 and October 1993). Millions of consumers have refinanced their first mortgages, and in the process some have rolled the outstanding balances on their home equity obligations into a single new loan. As a consequence, the proportion of homeowners having home equity credit at the time of the 1993-94 survey is likely smaller than it would have been had longer-term interest rates not fallen so sharply.

SOURCES OF HOME EQUITY CREDIT

Many types of lending institutions extend home equity credit. Today, the market is dominated by depository institutions, especially commercial banks, although savings institutions (savings banks and savings and loan associations) continue to play an important role (table 3). Household surveys reveal some specialization among creditors by type of credit. In particular, finance companies continue to be a major source of traditional home equity loans (originating almost 30 percent of these loans), but they provide relatively few home equity lines of credit.

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The larger role of finance companies in the traditional home equity loan market can be traced to several factors. First, finance companies (except those affiliated with depository institutions) typically do not offer deposit services; consequently, they are not well suited to offering credit accounts (such as lines of credit) that can be accessed by check, a basic feature of virtually all home equity lines of credit. Second, finance companies historically have tended to serve consumers who have somewhat lower incomes and smaller amounts of home equity.(2) Many lenders prefer to exercise tighter control over the credit use of such customers by granting them loans of specified amounts having predetermined repayment schedules.

Among depository institutions, commercial banks and savings institutions have nearly equal shares of the market for traditional home equity loans, but commercial banks are the predominant source of home equity lines of credit, with a 60 percent market share. Responses to the two most recent household surveys indicate that the commercial bank share of the market for home equity credit lines has increased in recent years.

Although commercial banks are the predominant source of home equity lines of credit, not all banks offer this type of loan. At the end of 1993, 46 percent of all US. commercial banks held outstanding balances on home equity lines of credit (table 4). By comparison, 81 percent held traditional home equity loans.

Home equity lines of credit are more complex to administer than are traditional home equity loans; consequently, larger banks are more likely than smaller banks to offer lines of credit. Although the vast majority of commercial banks with assets exceeding $250 million offered home equity lines of credit in 1993, only 24 percent of those with assets of less than $50 million did so. The pattern is quite different for traditional home equity loans, with most banks at all asset levels offering such loans.

USERS AND USES OF THE HOME EQUITY CREDIT

Homeowners can be grouped into one of four categories on the basis of their mortgage debt status--those without mortgage debt, those with only an outstanding first mortgage, those with a home equity line of credit, and those with a traditional home equity loan. The "average" characteristics of the homeowners in these four categories differ, in some instances rather substantially (table 5). Homeowners who have no mortgage debt stand out because they are much more likely than those who do, to be headed by an older individual (in many cases retired). Moreover, although they typically have substantial equity in their homes, their current incomes are not especially high compared with the incomes of other homeowners.

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Characteristics of Households with Home Equity Credit

Homeowners who have a home equity line of credit typically own more expensive homes, have higher incomes, and have accumulated substantially more equity in their homes than other homeowners, including those who have traditional home equity loans and those with only first mortgage debt. They also tend to be somewhat better educated. For these reasons, a home equity line of credit is often characterized as an "upscale" product. In 1993, the average family income for homeowners with credit line accounts was $61,234, compared with $46,162 for those with traditional home equity loans and $51,756 for those with only first mortgage debt. Differences in levels of home equity are more substantial: The average for credit line holders was more than twice that for traditional home equity loan users and almost twice that for homeowners with only first mortgage debt.

The strong relationship between having a home equity credit line and high levels of income and remaining home equity can be seen when homeowners are grouped by level of income and home equity (table 6). For homeowners in the two highest family income groups, the proportions with credit lines are two to nearly four times as large as the proportions for the three lowest income groups; the linkage with income is much less pronounced for holders of traditional home equity loans. The proportion of homeowners who have a line of credit also increases sharply with the level of home equity, but the relationship is reversed for traditional home equity loans. Similarly, homeowners who own relatively expensive homes are more likely to have a line of credit than are owners of less expensive homes. The relationship between home value and having home equity credit appears to be much weaker for traditional home equity loans: The proportion rises from the lowest-value categories but drops off again in the higher-value categories.

The prevalence of home equity credit varies somewhat by region of the country (table 6). Specifically, a smaller proportion of homeowners in the South have home equity credit of either type than in the other three major regions of the country. As in 1988, the Northeast has the highest incidence of lines of credit, although the North Central and West regions experienced the largest percentage increases from 1988 to 1993-94; in both regions the proportions rose from 4 percent to 9 percent.

Additional evidence of the regional character of home equity lending is the large differences among banks, depending on the location of their headquarters, in the share of their loan portfolio devoted to home equity lending (table 7). Among all domestically chartered commercial banks, outstanding balances on home equity lines of credit accounted for only 3.6 percent of outstanding balances on all loans and leases at the end of 1993, and traditional home equity loans for only 2.6 percent. However, the proportions varied substantially from state to state. Banks headquartered in the New England states had relatively high ratios of total home equity loans to total loans and leases, as did banks in several Mid-Atlantic states (see map). In the West, banks headquartered in California, Utah, Hawaii, and Arizona also had relatively high ratios.

Amounts Borrowed

Amounts borrowed under home equity lines of credit and traditional home equity loans differ (table 8). On average, credit line users (including those who have no outstanding balance) owe less than users of traditional home equity loans, although both groups have similar proportions owing relatively large amounts (outstanding balances of $25,000 or more). In 1993-94, the mean and median amounts owed by homeowners with traditional home equity loans were $16,199 and $11,000 respectively, compared with $14,401 and $10,000 respectively for users of credit lines. A comparison with the 1988 household survey indicates that the average balance owed on traditional home equity loans has fallen roughly $3,000 (measured in nominal dollars) since 1988, whereas the average amount owed on home equity lines of credit has changed little.

Most consumers who have home equity lines of credit owe an amount well below the maximum allowed under their credit line. In 1993-94, the median credit line available to homeowners with lines of credit was $25,000, two and one-half times the median amount actually owed. A substantial proportion of homeowners who reported having a credit line (about one-fifth) had no balance outstanding. Although significant numbers of homeowners surveyed in 1993-94 had no outstanding balance, the proportion with no balance outstanding was down substantially from 1988 (the proportion in that year was two-fifths).

Three-fifths of homeowners who had no outstanding balance on their line of credit when surveyed in 1993-94 had never used their account; some of these were new account holders, but many were not. The large number of unused accounts suggests that many homeowners who have established lines of credit have done so either to meet anticipated specific needs at some future time or as a standby source of funds. If some homeowners do view home equity lines of credit as a standby source of funds, lending to them might be viewed as relatively risky, as they could choose to borrow only if they were experiencing financial distress. To date, however, lenders report low delinquency rates for home equity lines of credit.

Delinquency Rates

Compared with other types of consumer lending, home equity debt, particularly lines of credit, has had low delinquency rates over time (table 9). Such experience is not surprising. Because home equity debt is typically secured by the homeowner's principal residence, borrowers would be expected to go to great lengths to make their payments. Also, home equity borrowers, with substantial levels of home equity and relatively high incomes, are typically better off financially than other homeowners, and consumers in general. Finally, as is discussed later, a large share of the funds borrowed under home equity loans are used for home improvement, adding to the value of the home, or for other purposes that enhance the borrower's financial circumstances (for example, repayment of other debts that carry higher interest rates).

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Rates of delinquency on home equity lines of credit to date have typically been only about half those on traditional home equity loans. Several factors may account for the differences. As noted, credit line borrowers, on average, have higher incomes and more equity in their homes than do traditional loan borrowers. Also, traditional loan borrowers, on average, owe more than credit line users. Finally, many line of credit plans have flexible repayment schedules that allow nominal payments in the first few years but larger payments in subsequent periods to fully amortize the debt. Credit line borrowers who are in financial distress may be better able to meet their near-term obligations than traditional home equity borrowers, who typically face fully amortizing, fixed repayment schedules.

Uses of Borrowed Funds

The 1993-94 household survey, like the 1988 survey, found that the principal uses for both types of home equity credit have been to finance home improvements and to repay other debts (table 10). The patterns of usage diverge, however, when other purposes of borrowing are considered: Vehicle purchases, education expenses, and business uses are relatively more important uses of credit line borrowings than of traditional home equity loans. Perhaps the most notable changes from 1988 to 1993-94 were a surge in the reported business use of lines of credit and less frequent use of traditional home equity loans to purchase real estate. The decline in the reported use of traditional home equity loans to purchase real estate may indicate that fewer homeowners are willing to leverage their principal residence to purchase other real property during a period when real estate values have appreciated more slowly, or even declined, in many parts of the country. For some homeowners, declines in home equity may have precluded their ability to make other real estate purchases.

Consumer Knowledge About and Satisfaction with Home Equity Credit

To learn more about their concerns, motivations, and behavior with respect to their home equity credit, the 1993-94 survey asked consumers a series of questions about their understanding of the product, their shopping for credit, their knowledge of consumer protections, and their attitudes toward their home equity accounts. For comparison, similar questions were asked of consumers who were users of other forms of installment credit but who did not have any home equity debt outstanding.

One line of questioning focused on consumers' understanding about creditors' security interest in their residences. Almost all users of home equity credit (99 percent of credit line holders and 98 percent of traditional home equity loan borrowers) indicated that the lender had explained, or they had already known, that their home was collateral for the loan (table 11). About 90 percent of both groups recalled the lender informing them that they had the right to cancel the credit arrangement within three days, or said that they had already known about that protection.(3)

Consumers with home equity credit cited many courses of action a creditor might take if they missed several payments, including foreclosing on their home, sending late-payment notices, contacting a collection agency, assessing late-payment fees, and working out a revised payment schedule. When asked what they thought was the worst thing a lender could do if several payments were missed, most respondents (78 percent of credit line holders and 87 percent of traditional home equity loan borrowers) said the lender could foreclose on the loan. Thus, although virtually all home equity account holders recognized that a lien had been placed on their property, not all believed that foreclosure and loss of the property was the most severe possible outcome, perhaps indicating that some borrowers have substantial other resources available to meet obligations.

Another group of questions concerned efforts to gather information before opening an account. About two-fifths of home equity credit account holders searched for information about home equity credit before opening the account, slightly more than the proportion of installment credit users. Most of the information searches involved calling or visiting one or more institutions to ask about interest rates. Well over 90 percent of the searchers said they were able to get all the information they were looking for, and a few more said they were able to obtain at least some of the information they sought.(4) Eighty-nine percent of credit line holders recalled having received a Truth in Lending (TIL) disclosure statement, and 90 percent of that group had saved the statement.(5) The proportion that recalled having received a TIL statement was slightly lower for users of traditional home equity loans, although the proportion of this group that had saved the statement, at 93 percent, was slightly higher. About two-thirds of those who recalled having received a TIL statement said the statement had been helpful to them in some way, but only 6 percent to 12 percent said the TIL statement had affected their decisions to use credit.

A final set of questions concerned consumer satisfaction with their home equity or installment credit. Ninety-five percent of home equity credit line holders were somewhat or very satisfied with the account, a bit higher than for traditional home equity loan and installment credit users. Of the small percentage of account holders who were dissatisfied, most complaints concerned the interest rate associated with the loan.

AGGREGATE HOME EQUITY DEBT

Data from lending institutions, together with information from the household survey, suggest that outstanding home equity debt totaled about $255 billion at the end of 1993. Borrowing against home equity lines of credit is estimated to have totaled about $110 billion, and traditional home equity loans, about $145 billion. Aggregate estimates suggest that the growth of home equity debt slowed considerably after 1988, and that the amount of such debt outstanding apparently contracted slightly during 1992 and 1993. The following paragraphs summarize aggregate estimates of home equity debt outstanding and discuss various factors underlying the apparent recent weakness (an explanation of the construction of the aggregate figures is given in the box).

Amounts Outstanding

Comprehensive figures on home equity lending are not available for all types of lenders, although more complete data have been reported in the past few years. Commercial banks, the dominant provider of credit under home equity lines of credit, had receivables of $73 billion at the end of 1993, nearly double the amount for all other lenders combined (table 12). They are also the leading provider of traditional home equity loans, although their market share is much smaller for this type of credit.

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In an earlier article, based on less-complete institutional data, we estimated that debt outstanding on home equity lines of credit was about $75 billion at the end of 1988.(6) Given this estimate, debt on home equity credit lines grew $35 billion over the five-year period through 1993, or at an average rate of around 9 percent per year. The pattern of growth was far from smooth, however. Much of the increase occurred in 1989 and 1990, with total credit line debt apparently peaking at about $114 billion in 1991 and 1992 and then contracting a small amount in 1993.

The extent to which traditional home equity debt has increased or contracted since 1988 is difficult to determine precisely. With virtually no institutional data as a basis for calculations five years ago, we estimated traditional home equity debt at the end of 1988 to have been within a range of $135 billion to $190 billion. As more detailed data have become available, it has become possible to make more accurate estimates for subsequent years. Although our estimates from 1990 forward should still be viewed as subject to a fairly wide margin of error, it seems reasonable to conclude that this type of home equity debt also contracted a bit in recent years, and perhaps leveled off in 1993.

Influences on Growth

Several factors may account for the weakness of home equity lending in the recent past. Stagnant real estate values in many localities for considerable stretches of time since 1988 have tempered the growth of equity in homes. With slower growth of home equity, fewer homeowners have become qualified for home equity credit-and those that have qualified may have become more cautious, perhaps because of lowered expectations about future increases in home values. Reacting to similar concerns about prospective trends in home values, lenders may have been more cautious in approving or soliciting applications for home equity credit.

The geographic regions of the nation where gains in home prices since 1988 have been weakest have also generally experienced the smallest increases in the proportion of households having home equity debt. The Northeast, which by most measures experienced a decline in average home prices between 1990 and 1993, was the only region in which the proportion of households with home equity lines of credit did not increase over the 1988-93 period. The proportion in the Northeast, at 12 percent for 1993, was still higher than elsewhere, but other regions, particularly the North Central, narrowed the gap considerably. The North Central region, which apparently was least affected by the weak home prices, was the only region that showed increases in both the proportion of homeowners with home equity credit lines and the proportion with traditional home equity loans.

More generally, the recession that beset the economy in 1990 and 1991 no doubt had a damping effect on home equity borrowing, indirectly by contributing to the sluggishness of home values and directly by affecting household propensities to spend. Concerns of many consumers about job and income security, and in some cases actual income reduction and job loss, deterred some consumers from carrying out home improvement projects, purchasing automobiles, and making other types of major expenditures often financed through home equity credit. Constrained spending meant simply that households had less need for home equity credit than they might otherwise have had.

Movements in interest rates likely affected the use of home equity debt in several ways. For instance, sharp declines in rates paid on deposits and other assets held by consumers may have led some borrowers to liquidate assets to pay down debt, particularly fixed-rate debt such as traditional home equity loans. For precautionary and other reasons, many people hold sizable amounts of interest-bearing assets even though they have debt, but changes in relative interest rates can induce balance sheet adjustments. Rather than roll over a maturing certificate of deposit or Treasury note at a sharply lower rate, many people during the past two years probably decided to sacrifice some liquidity to retire debts on which rates had not adjusted downward.

Large declines in interest rates on originations of consumer loans since 1991 may have prompted some households to choose a consumer loan rather than home equity credit to finance certain expenditures. For example, between late 1991 and early 1994, the average rate on a forty-eight-month new-car loan at banks dropped from 10 1/2 percent to about 7 1/2 percent. The typical rate on a home equity line of credit, indexed at 1 1/2 percentage points over the prime rate and tax deductible, would still have been somewhat below the auto loan rate. However, the narrower margin between rates on consumer loans and home equity lines may have moved some potential home equity borrowers to decide that the lower cost of credit-line debt no longer outweighed the risk of having a lien on the home. Most recently, the upturn since late 1993 in market interest rates--to the extent that the rise fostered expectations of further rate increases in the future--may have made households more wary about borrowing through variable-rate lines of credit.

Having perhaps the greatest impact on home equity borrowing in 1993 was the wave of refinancings of first mortgage debt prompted by the lowest mortgage interest rates in more than twenty years. Receivables on home equity lines at commercial banks actually declined during the second half of 1993, and at year-end they were virtually unchanged from their 1992 ending level. As mortgage rates fell throughout 1993, and especially when they dropped below 7 percent (for a thirty-year fixed-rate loan) in October, refinancing activity soared. Homeowners with equity-backed credit lines typically folded them into the new first mortgage to lock in a low rate. Some refinancing homeowners in this situation might have been able to obtain a new home equity credit line, given sufficient equity, but any outstanding balance probably would have been much smaller than the balance on the previous line that had been refinanced into the new first mortgage.

OUTLOOK

Borrowing against home equity is unlikely to grow again as explosively as it did in the mid-1980s; rather, it is expected to register periods of brisk expansion alternating with periods of more subdued growth, roughly in line with fluctuations in big-ticket expenditures. In the near term, some pickup is likely because mortgage refinancing should pose less of a constraint in coming months, in view of the exceptionally heavy volume of refinancing that has already been completed and the recent rise in mortgage interest rates. Over the longer term, the appeal of comparatively low interest rates, tax deductibility, convenience in borrowing, and flexibility in repayment should continue to attract credit seekers to home equity lines of credit. Movements in home values will play a key role in determining the vitality of home equity borrowing but are difficult to predict. Moderate recovery from the housing market doldrums of the past few years appears to be under way in many localities, but few observers anticipate the sort of all-out boom that characterized substantial parts of the 1970s and 1980s.

APPENDIX: THE SURVEYS OF CONSUMES

To obtain information on the prevalence of home equity accounts and their use by homeowners, the Federal Reserve Board helped develop questions for inclusion in the Surveys of Consumers for the period November 1993 through March 1994, conducted by the Survey Research Center of the University of Michigan. Survey interviews were conducted by telephone, with telephone numbers chosen from a cluster sample of residential numbers. The sample was chosen to be broadly representative of the four major regions--Northeast, North Central, South, and West--in proportion to their populations (residents of Alaska and Hawaii were not included). For each telephone number drawn, an adult from the household was randomly selected as the respondent.

The survey defined a household as any group of persons living together who are related by marriage, blood, or adoption, or any individual living alone or with persons to whom the individual is not related. The head of the household was defined as an individual living alone, the male of a married couple, or the adult in a household composed of more than one person and only one adult; generally, where there was no married couple and more than one adult, the head was the person most familiar with the household's finances, or the one closest to age 45. Adults were persons age eighteen or older.

The survey sampled 2,537 households, 1,762 of which were homeowners; 153 homeowners reported having a home equity line of credit, 88 reported having a traditional home equity loan, and 5 reported having both types. The survey data have been weighted to be representative of the population, thereby correcting for differences among households in the probability of their being selected as survey respondents. Estimates of population characteristics derived from samples are subject to errors based on the degree to which the sample differs from the general population. Table A.1 indicates the sampling errors for proportions derived from samples of different sizes.

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Estimation of Aggregate Debt

The procedure for constructing aggregate estimates of home equity debt outstanding for 1993 is described here. The same approach was used to estimate debt outstanding for the preceding two years; before 1991, however, much of the source data was not available.

Commercial banks have reported receivables under home equity lines of credit on their quarterly Call Reports since 1987, and have provided data on holdings of traditional home equity loans since 1991. Mutual savings banks also report these data on Call Reports. Savings and loan associations and federal savings banks report credit line receivables on Call Reports but do not separate traditional home equity loans from first mortgage debt. Finance companies report monthly to the Federal Reserve on total real estate credit on their books, but they do not differentiate first and second mortgages, nor do they distinguish residential from commercial mortgages. Estimates of both types of home equity debt outstanding at credit unions are available from the Credit Union National Association. Data from these institutional sources, supplemented by information on sources of credit from the household survey, were used to estimate aggregate home equity debt outstanding.(1)

Debt Under Home Equity Lines of Credit

According to Call Reports, commercial banks had $73 billion of receivables under home equity lines of credit at the end of 1993, and savings institutions--mutual savings banks, federal savings banks, and savings and loan associations--together had about $18 billion outstanding (table). Credit unions held $11 billion. The relative magnitudes of these figures appear roughly consistent with the distribution of sources of credit lines reported in the household survey.

No direct estimate of credit line receivables is available for finance companies. Total real estate debt held by these firms was nearly $69 billion at the end of 1993. Discussions with industry members suggest that two-thirds to few Quarters of this total, or $46 billion to $50 billion, was home equity debt of households. Relatively little of the home equity lending by finance companies is carried out via credit lines, a fact reflected in the household survey responses: Finance companies supplied only 6 percent of the credit lines surveyed. If the survey estimates of market share by type of lending institution are reasonably accurate, then finance company receivables from credit lines at the end of 1993 were about a tenth the size of commercial bank holdings, or about $7 billion to $8 billion.

Summing the totals for all types of institutions yields an aggregate estimate of $110 billion for debt outstanding on credit lines at the end of 1993.

Debt Under Traditional Home Equity Loans

Estimating the amount of traditional home equity debt outstanding is somewhat more difficult, because fewer institutions provide specific data on this type of loan, and those that do report these loans as a separate item (commercial banks and credit unions) have much smaller market shares than is the case for credit fine debt. According to the household survey, commercial banks and credit unions together account for about 40 percent of traditional home equity debt outstanding. Commercial bank holdings reported on Call Reports totaled $49 billion at the end of 1993, and credit unions had receivables of $9 billion; their combined holdings, as a 40 percent share of the market, imply a total of around $145 billion in traditional home equity loans outstanding.

Savings and loan associations and federal savings banks do not report traditional home equity loans separately from their other residential mortgage debt. The household survey indicates that savings institutions (including mutual savings banks) accounted for about 22 percent of the volume of traditional home equity loans outstanding. If so--and assuming that $145 billion is a reasonable approximation of the total--the savings institution share of home equity loans outstanding at the end of 1993 was about $32 billion.

As stated earlier, finance companies had an estimated $46 billion to $50 billion of home equity debt on their books at the end of 1993, about $8 billion of which was probably taken out under lines of credit. The remaining $40 billion or so would be traditional home equity debt, making finance companies the second largest supplier of this type of loan. Other types of lenders--including mortgage bankers and individuals--also supply a significant amount of funds to users of traditional home equity loans. The household survey suggests that close to 10 percent of traditional loans outstanding comes from these other sources, which would amount to about $15 billion at the end of 1993. (1.) Because the data from most institutional sources reflect only home equity credit carried on their own balance sheets, receivables that have been securitized and removed from the balance sheets of loan originators are not fully reflected in these estimates. (1.) The 1993-94 household survey (formally, the 1993-94 Surveys of Consumers), conducted by the Survey Research Center of the University of Michigan, is described in the appendix. Descriptions of the earlier surveys appear in the following publications: 1977 survey--Thomas A. Durkin and Gregory E. Elliehausen, 1977 Consumer Credit Survey (Board of Governors of the Federal Reserve System, 1978); 1983 survey--Robert B. Avery, Gregory E. Elliehausen, Glenn B. Canner, and Thomas A. Gustafson, "Survey of Consumer Finances, 1983," Federal Reserve Bulletin, vol. 70 (September 1984), pp. 679-92; 1988 survey--Glenn B. Canner, Charles A. Luckett, and Thomas A. Durkin, "Home Equity Lending," Federal Reserve Bulletin, vol. 75 (May 1989), pp. 333-44. (2.) According to the 1993-94 household survey, the average family income of home equity borrowers at finance companies was 46,000, compared with $59,000 at commercial banks and savings institutions. Finance company borrowers also typically had less home equity than depository institution borrowers: $39,000 compared with $97,000. (Data not shown in tables. (3.) The three-day right to cancel a home equity loan transaction, known as the right of rescission, is part of the Truth in Lending Act. (4.) These questions were asked only of those who had obtained home equity credit or installment credit. The survey did not address the experience of any households that might have sought home equity credit but did not obtain it. (5.) Truth in Lending disclosure statements must be provided to consumers by creditors in connection with credit transactions. The statements include information about key terms related to the transaction, including the annual percentage rate. (6.) Canner and others, "Home Equity Lending."

Glenn B. Canner and Charles A. Luckett of the Board's Division of Research and Statistics and Thomas A. Durkin of the Office of the Secretary prepared this article.