Homeowners are watching their home equity levels rise, but tapping into this pool of home equity to finance remodeling projects remains difficult in today's lending environment.

While the hope was rising equity could support the issuance of home equity loans by banks and potentially increase the pool of borrowers eligibile for refinancing, many institutions are gun shy about investing in new products and providing home equity lines of credit. And this is unfortunate because more homeowners are now interested in restoring their properties, Fitch Ratings claims in a new report.

To put it into perspective, homeowners watched their equity increase $571 billion in the second quarter of 2013, and $2.2 trillion over the past year, according to research firm Compass Point Research & Trading.

Although this is an impressive trend for the home improvement sector, challenges still remain that could derail a sustained rebound in home remodeling spending.

Bank lending standards are easing a bit but remain relatively tight, making it difficult for homeowners to use credit finance remodeling projects, pointed out Fitch Ratings analysts Robert Rulla, Robert Curran and Philip Zahn.

However, Business Loan Connection managing director Bob Rubin pointed out that while credit guidelines are tight, the bigger problem is banks, thrifts and credit unions refusing to explore various products to tap into a new market of profitability.

One loan product specifically focuses on home improvement loans, which goes up to roughly $30,000 and goes beyond the loan-to-value of a particular product.

"There are a lot of smaller banks that are doing this now, and it enables a bank to not have reserves on that particular product, enabling them to be able to offer a product that in theory doesn't even exist," Rubin explained.

However, many banks are reluctant to use a new product that has no history of positive results.

And as banks continue to face compliance issues and regulatory uncertainty, many of the smaller entities are fearful of taking big risks, which leaves a market of eligible homeowners with lines of credit unable to restore their homes.

"Historically, banks have always wanted to loan to people who didn’t need them, and we recently have seen this shift where banks were actually loaning to people who needed one, but didn’t have the ability to meet payment requirements," Rubin said.

It’s important to note that other challenges remain for the home improvement sector, including elevated unemployment levels and weakening consumer confidence relative to historical patterns.

Regardless, Fitch expects remodeling spending to pick up for the remainder of the year and into 2014 as homeowners revisit restoration projects once deferred.

"Most investments in home improvements over the past few years were focused on necessities," Fitch Ratings analysts said.

They concluded, "Now there are indications homeowners, although still cautious, are somewhat more willing to undertake discretionary projects and purchases."