Is HELOC demand about to skyrocket?
Homeowners look to tap available equity
The demand for Home Equity Lines of Credit started to surge last year and is only predicted to maintain its upward trajectory as mortgage rates start to increase, a new market report from Black Knight said.
According to the report, HELOC originations are on the rise, with total line amounts originated jumping 35% year-to-date over 2014 levels.
As a result, average HELOC line amounts sit at the highest level since Black Knight began tracking this data back in 2005.
“In total, we’re looking at over 37 million borrowers with current CLTVs below 80% that have an average of $112,000 equity available to tap in their homes, an increase of 3.1 million from just a year ago,” said Black Knight Data and Analytics Senior Vice President Ben Graboske.
Black Knight calculated this by looking at the amount of tappable equity available on each home with a mortgage, using an upper limit of 80% current combined loan-to-value, including first and second liens.
With the current rates, Graboske said that roughly half of the tappable equity belongs to borrowers whose first-lien mortgages have current interest rates higher than today’s 30-year rate – making them potential candidates for cash-out refis.
The most recent mortgage rate report from Freddie Mac showed that the 30-year fixed-rate mortgage dipped to 3.97%, down from 4.01% the week before.
Freddie Mac’s chief economist, Sean Beckett, said in his predictions for 2016 that the market should expect the 30-year fixed-rate mortgage to average below 4.5% for 2016 on an annualized basis.
Meanwhile, the other half of tappable equity belongs to borrowers whose first-lien mortgages have current interest rates under 4%, the Black Knight report explained.
“While it’s not a hard and fast rule that borrowers won’t refinance into a higher rate in order to tap available equity – 23% of cash-out refi borrowers over the past six months did just that – for the most part, as rates rise, HELOCs will continue to become more popular to homeowners looking to tap available equity,” said Graboske.
More importantly, Graboske added that the increase in HELOC demand carries very low risk.
For starters, he said, “While HELOC line amounts may be at 10-year highs, initial utilization rates – a key HELOC risk factor – are near 10-year lows.”
“In addition, the average resulting CLTV for borrowers with second-lien HELOCs is 66%, well below the 75-76 percent range seen during the bubble era,” Graboske said. “Finally, in another sign of the market segment’s relatively low risk level, average credit scores on HELOC originations remain near record highs (780), with nearly 70% of lines going to borrowers with 760 credit scores or higher.
Right now, banks, like Wells Fargo, are stepping away from home equity closed-end loans and choosing to invest in home equity (non-TRID) line of credit products.
“Because closed-end loans were a small percentage of our overall home equity volume, we chose to focus on our line-of-credit offering and not to expend the resources required to retool our closed-end home equity disclosures to meet the new TRID regulations,” said Kelly Kockos, SVP, Home Equity Product Manager, Wells Fargo, at the time.
Wells Fargo said it stopped offering closed-end home equity loans in light of the TILA-RESPA Integrated Disclosure Rule that took effect in October 2015.