History of Home Equity Loans

Home equity loans have been around for nearly a century, offering borrowers a way to cover major expenses such as home repairs, medical bills, and debt consolidation. Despite their long history, however, the popularity of these loans has waxed and waned over the past several decades. They’ve also evolved over the years to meet the needs of consumers looking for more flexible ways to borrow against their homes.

Here’s a look at the history of home equity loans, including their rise to mainstream use in the 1980s, part in creating the Great Recession, and sudden decline at the start of the COVID-19 pandemic.

Originally for the Less Creditworthy

Home equity loans, which allow homeowners to turn their home equity into cash, have been around since the Great Depression, although they were relatively uncommon at first. Lenders were primarily consumer finance companies and specialized second mortgage companies, with depository institutions accounting for only about two-fifths of loans issued. Economic conditions caused many property owners, especially farmers, to be at risk of foreclosure and, with sources of credit difficult to find, the loans began as a way to stave off disaster.

For example, if an individual owned a home valued at $100,000 and only owed $50,000 on their first mortgage, a lender might allow the individual to take out another $25,000 in the form of a home equity loan. Alas, this second mortgage rarely helped in the long run as the Depression deepened and many people lost their properties. As a result, home equity loans were equated with poverty and carried a social stigma.

Becoming Mainstream in the 1970s and 1980s

This began to change in the 1970s and 1980s. A number of factors contributed to their explosion in those decades, including the fact that more depository institutions—including big-name banks—decided to get into the market.

Banks had certain advantages over finance companies, including the ability to offer home equity lines of credit (HELOCs) that consumers could access by writing a check. Suddenly, homeowners had the ability to borrow only the amount they needed, when they needed it, rather than taking out a lump-sum loan. Depository institutions also tended to have an older client base than finance companies did, with more equity from which to draw.

The popularity of these loans only grew with the passage of the Tax Reform Act of 1986, which removed the tax deduction for the interest paid on non-mortgage debt. This, in conjunction with comparatively low interest rates, made home equity loans much more attractive than unsecured loans, which you could no longer write off on your tax return. As a result, the sector grew at a staggering pace. The total value of outstanding equity loans jumped from $1 billion in 1982 to $188 billion in 1988.

Marketed to the Masses by Big Banks

The 1986 tax law wasn’t the only force driving the explosion of home equity lending, however. Around the same time, larger banks were undertaking a concerted effort to change the image of second mortgages, once thought of as a last resort for the financially troubled.

One of the first things banks did was to change their advertising terminology. Pei-Yuan Chia, a former vice chairman at Citicorp who oversaw the bank’s consumer business in the 1980s and 1990s, told The New York Times in a 2008 interview: "Calling it a 'second mortgage,' that's like hocking your house, but call it 'equity access,' and it sounds more innocent." Citigroup introduced a campaign in the early 2000s urging homeowners to “live richly.” Banco Popular had a “Make Dreams Happen” ad campaign that used the slogan “Need Cash? Use Your Home.”

“Banking started using consumer advertising techniques more like a department store than like a bank,” Barbara Lippert of Adweek told The New York Times in 2008. “It was a real change in direction.” What these marketing campaigns usually left out were the dangers that come with these loans, including the risk of foreclosure for borrowers who couldn’t pay them back.

Playing a Part in the Great Recession

The market for home equity loans continued to grow through 2005, when the value of new HELOCs reached nearly $364 billion. At that point, the growth of the market was fueled in large part by a lowering of credit standards, which meant even customers with weaker FICO scores or high debt-to-income (DTI) ratios could often get approved.

This all changed over the next couple of years, which saw a dramatic decline in home values and a corresponding surge in defaults, engendering the Great Recession. As a result, loan originations dropped off dramatically while banks tightened their lending guidelines. As the housing market slowly recovered, equity-based lending began picking up, though not at the pace experienced during the 2005 peak.

COVID-19 Slows Recovery

Home equity lending dipped again early in the COVID-19 pandemic, with banks such as JPMorgan Chase suspending HELOC originations on April 16, 2020, based on economic uncertainty and the tumultuous job market. Citigroup followed suit nearly a year later on March 3, 2021.

Even with the job market’s recovery and Americans sitting on a record amount of home equity—$9.9 trillion at the end of 2021, according to the data firm Black Knight—both of these major banks have yet to resume new equity loans. Bank of America, however, has continued to offer HELOCs, including a hybrid model with a fixed interest rate that can mimic a home equity loan. According to reportage by The Wall Street Journal, it initially implemented tighter lending standards to mitigate credit risk but has since reverted to its previous underwriting policies.

The absence of multiple large banks from the market hasn’t prevented home equity loans from making a comeback in 2021, however. The prospect of continued interest rate increases has made lower-cost home loans more attractive, leading to substantial growth in home equity loan originations and new HELOCs.

The Bottom Line

Home equity lending has been around for nearly a century, although the industry didn’t really come into its own until banks started reshaping the image of these loans in the 1980s, followed by Congress passing legislation that made them more attractive than other forms of borrowing. The Great Recession and the COVID-19 pandemic both put a damper on their use, but as of today, home equity loans remain a tremendously popular vessel for borrowing money.