A Brief History of Home Equity Loans

Louise Story has an excellent history of the home equity loan on the front page of today's NYT. She talks a lot about the explosion in such products -- outstandings rose a thousandfold, to $1 trillion, from the early 1980s to today -- as a product of clever bank marketing campaigns:

"That 'unused home equity in your house? Put it to work for you.' " Professor Warren said, mimicking the ads. "Doesn't that sound financially sophisticated?" Not to Professor Warren. "Put it to work," she said, is just a euphemism for borrowing.

Wall Street, too, is happy to lay the blame at least partially at the feet of Madison Avenue:

A spokesman for Citigroup said that the bank no longer runs the "Live Richly" campaign and that it no longer works with the advertising agency that created it.

And there's no doubt that rebranding played a large part in the common acceptance of these products. Elizabeth Warren is quite right: it's psychologically much easier to "put home equity to work" than it is to take out a second mortgage.

Story also manages to find a wonderful NYT story from 1988, which feels as dated now as if it were 1958:

The home equity loans ''are the highest quality consumer debt,'' Mr. Capasse said, noting that they are heavily concentrated in suburbs, where incomes are higher than average and property values tend to be stable. Contrary to fears that home equity loans would lead consumers to ''pledge the house to buy a blouse,'' Mr. Capasse said, ''there is very little convenience use of the accounts.''

Obviously this was before the days when home-equity lines of credit started coming with credit cards attached, so that it was actually easier, at the margin, to "pledge the house to buy a blouse" than it was to pay in cash. (Why, that would necessitate at trip to the ATM!)

Just as America's obesity problem is largely a function of the ubiquity of cheap high-fat food, America's debt problem is a result of the ubiquity of cheap easy-access credit. It started with credit cards, but the minute that you start running a monthly credit-card balance, it actually makes a certain amount of financial sense to take out a home equity loan. If you're going to be in debt anyway, then you start entering the world of liability management, where you want to minimize your interest rate, especially if doing so gives you a nice tax deduction to boot.

There were two big problems with this line of reasoning. The first is that home equity lines are secured -- credit-card delinquency is one thing, but losing your house is something else entirely. But consumers never really started taking into account the risk of foreclosure, especially not when house prices seemed as they'd only ever go up.

The second, bigger, problem is that just as you'll eat what's in front of you, just as traffic expands to fill the road space available, the massive expansion of credit only served to increase the amount of discretionary borrowing. A small home equity line is more than enough to cover a large credit-card balance: as these products became more popular, an extra zero was essentially put on to the amount of money that people felt they could borrow.

Besides, borrowing money is American, goddamit. As I said in May, there's an element of "yes we can" optimism to borrowing, and debt is, in the words of Tad Crawford, "not as merely an obligation to be paid but also a statement about how our inner richness will be expressed in the future". One of the reasons that Americans don't mind low taxes for the rich is that they hope and fervently believe that they, too, will be rich one day. And if you're going to be rich in the future, it makes sense to borrow money in the present.

All of which is to say that the banks didn't need to push very hard before they overcame whatever vestigial reluctance there was to borrowing money -- especially when, as Dean Baker points out,

if home prices rise 10 percent a year, and are expected to continue to rise for the indefinite future, then it is entirely reasonable for people to borrow against the new wealth created by this appreciation to support their consumption.

Whither the Heloc now? My feeling is that it's here to stay -- with tighter underwriting standards, of course. But as Story says,

For the first time since World War II, the portion of home value that Americans own has fallen to less than 50 percent. In the 1980s, that figure was 70 percent.

What a glass-half-empty view! It won't be too long, I'm sure, before banks start looking again at that 50% of home value which Americans do own, and start trying to monetize it somehow.