A combination of fast-rising home values and the fact that nearly two-thirds of borrowers with at least some home equity have mortgage rates below 4% — and would not benefit from refinancing — is helping to propel a resurgent market for home-equity lines of credit (HELOCs).
HELOCs allow homeowners to tap the equity in their home without incurring a much higher first-lien mortgage via a cash-out refinancing. The interest rate for a 30-year, fixed-rate mortgage averaged 5.22% as of August 11, according to Freddie Mac’s most recent weekly Primary Mortgage Market Survey.
The Federal Reserve Bank of New York’s second-quarter 2022 Household Debt and Credit Report shows that limits on HELOCs jumped by $18 billion in the second quarter of this year, “the first substantial increase in HELOC limits since 2011,” and an indicator of an increase in new originations. HELOC balances stood at $319 billion for the second quarter, according to the Federal Reserve report.
“Balances on home-equity lines of credit (HELOCs) increased by $2 billion [in Q2], a modest increase but one that follows many years of declining balances,” the report continued.
Another report by TransUnion shows the number of HELOC originations nationwide, based on the credit bureau’s analysis, jumped from 207,422 for second-quarter 2021 to 291,736 for the second quarter of this year — a 41% increase. TransUnion reports that as of first-quarter 2022, the most recent comparable data it had available, overall mortgage originations were down year over year as of first-quarter 2022 by nearly 45%, cash-out refinancings were down by 23% while HELOC origination volumes were up by 29% over the period.
“Mortgage lenders are now considering adding home-equity lending to their portfolios as they look for growth in a declining refinance market and seek opportunities to cross-sell to their existing customer base by tapping into historic amounts of home equity,” said Joe Mellman, senior vice president and mortgage business leader at TransUnion. “Consumers are increasingly interested in HELOC and home-equity loan lending — leveraging rising home values to access affordable capital.”
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One of the largest lenders in the country, Bank of America, also reported a big jump in overall home-equity loan originations over the first six months of 2022 — from about $1.7 billion in 2021 to $4.6 billion this year based on the principal amount of the total line of credit, according to the bank’s second-quarter 2022 earnings report. HELOCs were not broken out separately in that report.
HELOCs are revolving debt that, in the case of a 30-year HELOC, for example, involve a draw period of 10 years and a repayment period of 20 years. Unlike fixed-rate, lump-sum second-lien home-equity loans — HELOCs normally carry variable interest rates. HELOCs also are popular because the interest on the loans is tax deductible if the funds are used for approved home renovations.
“HELOCs seem to be like the only thing people are talking about these days,” said John Toohig, a managing director at Raymond James, a board member and president of Raymond James Mortgage Company and head of the firm’s Whole Loan Group. “We have already doubled our best year in trading HELOCs seven months into the year.
“We’ll probably trade a little over $1.2 billion by the end of the year if we keep this pace. So, a product that was relatively esoteric, something you didn’t regularly see, is now raging back.”
Toohig added that HELOC loan buyers include banks, credit unions, money managers and more, adding that the loans are typically kept on balance sheets — although there have been a few private-label securitizations involving HELOCs this year. Toohig’s take is that there are a lot of homeowners out there with “really low coupons” on their first mortgage, and they don’t want to refinance into a much higher-rate mortgage, even to get cash out, so HELOCs are gaining steam.
“I haven’t seen them [HELOCs] trade at this kind of pace in at least a decade,” he said. “It feels like every nonbank in the country has called me in the last two months wanting to stand up a HELOC program.”
Among the nonbanks that either have or plan to introduce HELOC loan products are Rocket Mortgage, Guaranteed Rate, loanDepot and New Residential Investment Corp. (recently rebranded as Rithm Capital).
Black Knight reports in its Mortgage Monitor Report for the second quarter that the amount of tappable home equity nationally hit $11.5 trillion in the second quarter — after accounting for homeowners retaining at least 20% equity. That figure is up by around $500 billion from the first quarter and $2.3 trillion year over year.
“At the end of Q2, the average U.S. homeowner had $216,900 in tappable equity, up $9.7K (5%) in the quarter and $43.4K (25%) from the same time last year,” Andy Walden, vice president of enterprise research and strategy at mortgage tech giant Black Knight, wrote in a recent report on the home-equity market.
In yet another report demonstrating the potential for the HELOC market, real estate data-solutions provider ATTOM found that nationally as of second-quarter 2022, the percentage of mortgaged homes considered to be equity rich stood at 48.1%, up from 34.4% a year earlier. In addition, ATTOM’s report states that at least half of all those paying a mortgage in 18 states were equity rich in the second quarter, compared with only three states as of first-quarter 2021 — and, year over year, equity-rich levels rose in all 50 states.
Equity rich, as defined by ATTOM, means that all debt balances secured by the property represent no more than 50% of the property’s estimated market value.
“After 124 consecutive months of home price increases, it’s no surprise that the percentage of equity rich homes is the highest we’ve ever seen, and that the percentage of seriously underwater loans is the lowest,” said Rick Sharga, executive vice president of market intelligence at ATTOM. “While home price appreciation appears to be slowing down due to higher interest rates on mortgage loans, it seems likely that homeowners will continue to build on the record amount of equity they have for the rest of 2022.”
Black Knight’s Walden added that some 73% of equity is now held by homeowners locked into first-lien mortgage rates below 4%, with half having rates below 3.5%.
“Borrowers [at these low rates] may be reticent to access their equity via refinancing,” he wrote in his report. “As a result, we expect to see more homeowners turning toward second-lien home-equity products [such as HELOCs].”