Are HELOCs the next big home credit product?

Borrower and investor demand rising

Demand for home equity lines of credit is soaring amid a steady stream of reports that homes prices are rising and are likely to continue to rise.

According to document volume data from home loan document preparation vendor International Document Services, home equity lines of credit have increased significantly amongst IDS clients in 2014.

From first quarter 2014 through third quarter 2014, IDS customers have already drawn more HELOC loan docs than they did in all of 2013.

And if current totals hold steady, 2014 HELOC loan doc draws could exceed those of 2013 by nearly 65%.

“Rising home prices have certainly encouraged borrowers to tap into their homes’ equity,” said IDS Executive Vice President Mark Mackey. “Because so many people were able to take advantage of the relatively low interest rates over the past few years, they are now highly incentivized to stay in and improve their existing home.”

But that trend may be changing. Looking at the latest Case-Shiller Home Price Index report, the home price index fell 0.5% in July, the biggest drop since November 2011 and the third month in a row of declines.

"While the year-over-year figures are trending downward, home prices are still rising month-to-month although at a slower rate than what we are used to seeing over the past couple of years," said David Blitzer, chairman of the Index Committee at S&P Dow Jones Indices.

In retrospect, IDS said other loan types seem to be holding steady.  Conventional and FHA loan doc draws increased almost 5% over 2013 volumes during the same period, and both VA and USDA/Rural loan doc draws are up around 10% and 17%, respectively.

And the trend goes outside of just IDS. According to an Experian report, for borrowers who already have a home, the demand for home equity lines of credit is increasing. There was a 41% increase in originations year over year, with 70% of HELOCs coming from super prime consumers.

Plus, there is also investor demand for HELOCs and other second lien mortgages according to capital markets advisory group MountainView Capital.

"Second lien trading activity during 2013 was light and down from 2012 levels, both in total unpaid principal balance and number of transactions,” said Jonas Roth, a managing director at MountainView Capital Group at the time. "This was primarily due to a finite number of sellers, and 2014 looks like more of the same."

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