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Interest rate hikes slow area's second mortgage activity

Construction crews building backyard decks the size of airport runways. Boaters plopping shiny new toys into the water. Remodelers changing basements from funky to fly.

For bankers, they have become the sweet sounds of spring in recent years.

But things have been a little quieter this year.

Whether scared off by rising interest rates or leery of adding to already high household debt, homeowners in northwest Ohio and southeast Michigan are increasingly shying away from the main vehicle used to pay for such high-ticket items: home equity loans.

Local lenders, to one degree or another, said they are issuing fewer of the loans. There are two main types: loans for set amounts that typically carry fixed interest rates, as well as lines of credit that usually have adjustable rates that follow prevailing rates up or down.

As property values rose amid a national housing boom, home equity loans became a hugely popular way for people to use the increased worth of their homes to pay for major household improvements, fancy cars, and even jewelry.

Although the loans were recorded as a second mortgage on the borrower's home, for many people they offered tax advantages and carried interest rates that were more favorable than credit cards and other loan types.

However, the popularity of home equity loans has declined as mortgage rates have risen. They typically carry interest rates that are slightly higher than mortgage rates, which currently stand at 6.66 percent nationally on average for a 30-year fixed-rate, according to the Mortgage Bankers Association in Washington.

At the Toledo Area Community Credit Union in Sylvania Township last week, so-called closed-end equity loans were being offered at 8 percent and adjustable-rate equity credit lines were 7.5 percent. The credit lines differ from other equity loans in that they represent a set amount - say $100,000 - from which homeowners can borrow and re-pay as needed.

"We originated about 30 percent fewer every year starting in 2003," said Ron Patton, senior vice president for lending.

To promote home equity loans, the credit union dropped interest rates on credit lines by one-half of a percentage point.

Still, with the Federal Reserve Board continuing to increase interest rates, customers have been reluctant to take out loans with interest rates that change.

Such fears have prompted some customers to fold the home-equity line balance into a new mortgage, Mr. Patton said. "It's a motivator for re-finances," he said.At Sky Bank, which is among the largest mortgage lenders in the area, "volume is down a bit from previous years," said Mike Klein, executive vice president of retail banking.

"It's not what we would like it to be, but it's steady," he added.

At Fifth Third Bank (Northwestern Ohio), another large mortgage lender locally, issuance of home equity loans "has softened a little but there hasn't been a significant drop off," said Bob LaClair, president.

The biggest factor in the decline has been a drop in home refinancings, he explained. About half of people paying off higher interest or adjustable rate loans last year also took out a home-equity line of credit.

Mr. LaClair declined to discuss how many homes Fifth Third has refinanced, but said that industrywide, the number of such loans has slipped about 20 percent from last year.

Also noticing the decline is Sue Kinder, Wood County recorder.

At one point, she noted, records on second mortgages showed that 75 percent of people financing or refinancing homes would take out home equity loans at the same time.

"We see very little of that today," said Ms. Kinder.

There were 1,944 mortgages issued in Wood County in the first quarter of 2006, or 21 fewer than the period a year ago and 292 fewer than two years ago.

In Lucas County, the number of mortgages in the first three months of this year slipped to 5,957 or 9 percent fewer than during the same period in 2005, according to the county recorder's office in Toledo.

National data confirms that the key factor in the falling popularity of home equity loans locally are fears of rising interest rates. Closed-end loans rose to 35 percent of second mortgages late last year, up from 22 percent at the outset of 2005, a trade group survey found.

Also, issuance of new home-equity lines of credit slipped 5 percent between the first and second half of 2005, although home equity loans overall grew 13 percent, the survey found.

Still, the figures suggest home equity credit lines won't disappear soon. Even with the decline, they represent up to 65 percent of home-equity loans overall.

But there are indications Americans may be growing concerned about rising debt levels.

Consumer credit - a category that includes credit cards and many other forms of borrowing - grew at an annual rate of just 2.6 percent in the first quarter of this year, according to the Federal Reserve. If that holds through 2006, it would be the lowest annual increase in five years.

Meanwhile, the decline in home equity loans locally may be showing up in other sectors.

"It's been a slow spring for home remodelers," said Art Mowrer, a partner in Mowrer and Stevens Construction Co., Temperance. "I can't say if it's due to interest rates or overall doldrums in our area."

Contact Gary Pakulski at: or 419-724-6082.

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