Magazine article Mortgage Banking

Seizing the Home-Equity Opportunity: A Home-Equity Lending Boom Appears on the Horizon, but Lenders Must Be Prepared If They Want to Participate

Magazine article Mortgage Banking

Seizing the Home-Equity Opportunity: A Home-Equity Lending Boom Appears on the Horizon, but Lenders Must Be Prepared If They Want to Participate

Article excerpt

Thanks to home-equity recovery across the country and the prospect of increasing interest rates in the near future, home-equity loans and home-equity lines of credit (HELOCs) are expected to experience a surge in demand on a scale not seen since, according to New York-based Fitch Ratings, new equity line originations peaked from 2004 to 2005. [paragraph] As consumer confidence grows and homeowners begin amassing equity in large amounts for the first time since the Great Recession, the market appears ripe for a home-equity boom that could change the composition of the average mortgage lender's portfolio for the next several years. [paragraph] Lenders wishing to capitalize on this opportunity should move swiftly to refine their strategies for targeting home-equity customers and delivering home-equity products efficiently and profitably. [paragraph] Household percent equity as reported by the Federal Reserve's Flow of Funds report reached 56.7 percent in third-quarter 2015--up from the previous quarter and the highest since 2006. Yet the home-price appreciation fueling this equity growth has been decelerating for the past two years. [paragraph] The Federal Reserve also announced a modest interest-rate increase of 0.25 percent in December 2015, and analysis performed using First American's Potential Home Sales Capacity model shows that market potential is already pre-adjusting in anticipation of additional Fed rate hikes in 2016 (see http://blog.firstam.com/economics/expectations-of-a-rate-increase-dampens-housing-in-october). [paragraph] As mortgage interest rates rise and house-price appreciation slows, more homeowners may opt to stay put rather than relinquish their current mortgages with record-low interest rates. Instead, these borrowers may increasingly look to home equity as a means of funding improvements to their aging homes or other household needs.

Just how big is the anticipated boom?

HELOC origination volume limits reached $42 billion in the second quarter of 2015. While this figure may seem small compared with $547 billion in first-lien mortgage originations, it represents significant growth in consumer appetite for home-equity lending.

According to Costa Mesa, California-based Experian Information Solutions' Consumer Credit Trends Report, year-over-year HELOC origination volume limits increased 24 percent in 2013, 22 percent in 2014 and 25 percent in the first half of 2015.

California dominates in HELOC origination volume with nearly $7.6 billion in the second quarter of 2015 alone, but the growing consumer demand for HELOCs is most pronounced in Washington, which has seen a 58 percent year-over-year increase in origination volume limits from $727 million in second-quarter 2014 to almost $1.2 billion in second-quarter 2015.

Five Western states--Idaho, Colorado, Montana, New Mexico and Utah--join Washington in the top 10 for year-over-year HELOC growth, according to Experian.

Homeowners have a range of options for accessing their equity, from cash-out refinancing to home-equity loans to HELOCs, and the decision is not necessarily a simple one to make. Moreover, changes in the market mean the best solution for a borrower may look quite different today than in the recent past.

According to the Freddie Mac Refinance Report, 34 percent of all refinances originated in the second quarter of 2015 were cash-out refinances that resulted in a higher loan amount than the original mortgage--up a considerable 12 percentage points from the previous year. Yet as interest rates rise, borrowers will begin to find themselves locked out of the cash-out refinance market; and the higher rates go, the more pronounced the lockout effect will be.

For many, the better alternative will be to tap into their home-equity through a closed-end home-equity loan or open-end HELOC. According to Atlanta-based Equifax Inc., home-equity loan originations jumped 22.4 percent in the first half of 2015 to 280,700. …

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