Home equity loans burgeon as homeowners cash in on the real estate boom of the 1980s.

Home equity loans burgeon as homeowners cash in on the real estate boom of the 1980s

Home equity loans, which allow borrowers to capitalize on the escalated real estate prices of the 1980s, are becoming increasingly popular both in the Southland and across the nation as the real estate industry struggles through the recession.

In 1990, outstanding home equity loans in which a large bank grants a line of credit secured by the equity in the home, increased by 20 percent in the U.S. and jumped by 40 percent in California, according to Elizabeth Laderman, economist for the Federal Reserve Bank of San Francisco.

In Los Angeles County, refinance and equity loans on commercial and residential property grew to $33.1 billion in 1990 from $27.6 billion in 1988, according to TRW marketing services.

And the number of mortgage brokers, who will often grant loans to persons who were denied by banks, quadrupled over the last four years, according to Larry Smith, mortgage lending activity manager for the California Department of Real Estate.

Home equity loans have become popular for a number of reasons, including the escalation of property value during the 1980s and that many homeowners these days are remodeling their homes rather than selling them in today's sluggish real estate market, bankers and mortgage brokers noted.

But the biggest reason for the growth in home equity loans may be that taxpayers, as of 1991 taxes, will no longer be able to deduct personal interest, such as the interest on credit cards.

Home equity loans are not a new idea. The loans, which a bank or mortgage broker secures with a lien against a home, were more commonly known as second mortgages.

"The idea that existed 15 to 20 years ago was that taking out a second mortgage is the last thing that you do before going bankrupt," said Derrald Johnson, director of marketing in the consumer loan division of Bank of America. "It's now become the smart way to borrow."

Harry Sisk, senior vice president in charge of consumer lending for Union Bank, noted that home equity loans increase around tax time because accountants and tax attorneys often advise clients to take out such loans to consolidate debt.

Johnson said there are two types of home equity loans, the installment loan in which a person receives the entire loan amount immediately, or the line-of-credit loan. Under the line of credit loan, a person may draw on the loan amount, for example $50,000, only when needed. If nothing is withdrawn, there is no interest charged, Johnson said.

Laderman noted that line of credit loans have grown enormously in the last few years.

There were $35.9 billion outstanding line of credit loans nationwide in January, 1991, as compared to $29.8 billion in January 1990, according to a survey of large banks, which account for 54 percent of all bank assets, Laderman said.

In California, outstanding home equity loans establishing a line of credit totaled $4.2 billion in December 1988, $6.1 billion in December 1989 and $8.6 billion in December 1990, she said.

Home equity loans granted by mortgage brokers have also grown, according to Real Estate Department's Smith.

The number of mortgage brokers which gave 20 loans or more worth $2 million or more, rose from 369 in 1989 to 600 in 1990, Smith said. Many mortgage brokers lend to people denied by banks because of poor credit, bankruptcies and other factors which banks consider risky, Smith noted.

Sisk of Union Bank said that reputable banks only lend to consumers with good credit ratings and a proven ability to pay back the debt. Mortgage brokers who lend to people with a poor credit history or bankruptcies may be looking "for the equity in the property and not necessarily the customers ability to repay the debt," he said.

But although the number of mortgage brokers and home equity loans has almost quadrupled in the last four years, the percentage of forclosues have declined, Smith said.

In 1989, the last year that statistics are available, 215,000 loans were serviced, 8,900 notices of default were served and about 700 properties went into final foreclosure, Smith said.

In 1988, 264 mortgage brokers serviced 78,000 loans, issued 8,600 notices of default and foreclosed on 730 properties. In 1987, 152 mortgage brokers serviced 58,000 loans, issued 6,000 notices of default and foreclosed on about 680 properties.

Mortgage brokers have been getting a bad rap from banks even though the number of foreclosures is small, said David Green, president of the Beverly Hills Investment and Loan. Mortgage brokers were servicing second mortgages before banks would consider issuing such loans, according to Green.

"The banks are saying that we are taking business from them, when in fact they came into our market, we didn't come into theirs," Green said.

Green said that interest on loans his company services range from 7.5 to 15 percent, depending on whether the loan is backed by a bank or private investor, the borrower's credit history, the amount of equity and other factors.

Mortgage brokers will lend to people who are bankrupt or unemployed because brokers believe "that the person who has equity in real estate has the right to borrow," Green said. "A person with bad credit and lots of equity, they try to preserve that equity," he said.

Green said that his company has seen an increase in business because people are unable to sell their homes in the current real estate market. Fewer clients these days are taking out home equity loans to buy another piece of property, Green noted.

Although home equity loans have boomed in recent years, in recent months, there has been a decline in the amount of home equity loans granted by banks and savings and loans in Los Angeles County, according to TRW marketing services.

Loans in Los Angeles County in December were at $1.6 billion, down from $1.7 in September and $2 billion in June, according to the TRW figures.

Johnson said that there is a decrease "in the rate of increase in the loans." That bank has the highest market share of loans and has also seen a decline in home equity loans, according to TRW statistics.

Johnson said that the economic uncertainty of the recession and the Persian Gulf War makes people less inclined to borrow.

Union Bank has also experienced a slowdown in home equity loans, said Harry Sisk, executive vice president of consumer lending. Sisk described the slowdown in home equity loans as "typical" for the holiday season.

Both Sisk and Johnson said that they expect the home equity loan applications to pick up as tax season gets under way. Sisk noted that tax advisers may be suggesting home equity loans in the next few weeks for clients to consolidate debt.

A person may deduct all the interest on home equity loans up to $100,000, no matter how the money is used, said Michael Fernhoff, a tax attorney and partner at the Los Angeles-based law firm of Sheppard, Mullin, Ritcher and Hampton. If the loan is used to acquire or improve the home, a person may deduct interest on a loan up to $1 million, Fernhoff said.

The 1986 tax reform act disallowed almost all forms of personal interest, including interest on credit cards, as tax exemptions, said Los Angeles tax attorney Michael Fernhoff. For the last four years the tax deductibity of personal interest, such as interest on credit cards, has been phased out.

"I know that banks strongly advise people that home equity loans should only be used for a major event," said John Hall, spokesman for the American Banker's Association. "The imprudent and incorrect use would be for the improvement of your lifestyle or `we're just strapped for cash, let's put up our home," he said.

PHOTO : Concrete asset: Home values provide cash infusions