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Home equity lending opportunities remain despite decline in tappable equity

HELOCs accounted for 53% percent of originations as of Q4 2022

Recent home price declines are leading to decreased tappable equity, but there are still opportunities in home equity lending, according to a report published by Home Equity Lending News

While 30-year fixed rates on first mortgages are far from the 4% range – which many existing first mortgages were refinanced to during the pandemic – the number of transactions where a second mortgage makes more sense than a first mortgage diminishes each time first-mortgage rates decline another 100 bps, according to the second mortgage market insights Q2 2023 report.

“Tappable home equity is expected to decrease to a forecasted $18.1 trillion as of the fourth quarter of 2023 from an expected $19.4 trillion at the end of this year. With home prices continuing to erode, tappable equity will also deflate. However, given that home-equity originations were less than $0.5 trillion last year, the decrease in tappable equity still leaves plenty of room for additional opportunity,” the report states. 

The report also notes a pickup in home equity activity, citing the Federal Reserve’s April Beige Book. 

“Consumer loan demand was mixed, with home-equity and used auto loans showing some increased demand over the last few months,” the Federal Reserve Board of Governors noted.

When Q4 2022 data is broken down by home equity transaction type, home equity line of credits (HELOCs) accounted for 53% percent of originations, while closed-end home equity loans (HELs), also known as HELOANs, made up 47%.  

When it comes to dollar volume, there were an estimated $251 billion in HELOC originations during all of 2022, soaring from $182 billion the year prior. This suggest about $200 billion in HEL production last year.

Delinquency on home equity products has also remained low. 

There was no change in the HELOC 90-day delinquency rate from the third quarter to the fourth quarter of 2022, standing at around 0.24%. It was the same story for HEL 90-day delinquency rate, which ended 2022 at 0.83%, unchanged from the third quarter of last year.

But concern is growing over the lower-credit lower-income product, the report notes. Another area to watch is the performance of loans approved through automated processes.

“Utilizing automated valuation models instead of full-blown appraisals or title searches in lieu of title policies makes loan production less expensive and more rapid,” according to the report.

The faster and cheaper replacements haven’t yet been tested in a down market, and these lesser versions might not be managing the risk well, John Toohig, president of whole-loan trading group at Raymond James, said.

“If you make it easy, that usually means you’re skipping a few things in credit,” Toohig said.

And as instant online automated approval and closing continues to elude home equity lending, attention has turned to artificial intelligence.

While several technology providers recently announced advancements with their platforms, the automation used by fintechs has been described as less than full documentation.

Non-bank lenders and government agencies are also competing with banks for their standings on search engine results, the report notes.

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