Rising interest rates are crushing mortgage refinance volumes, but homeowners are increasingly turning to second loans and aren’t expected to slow down anytime soon.
Lenders created some $100.8 billion in home equity lines of credit, or HELOCs, in the first five months of the year, up nearly 50% from a year ago, according to a report from the Center for Housing Finance Policy at the Urban Institute. Home equity loans saw a slightly smaller jump, totaling $38.1 billion through the end of May.
Further increases are likely as higher mortgage rates — which climbed above 5.5% last month – reversing the refinancing boom that resulted from the sharp drop in mortgage rates at the start of the pandemic.
One of the driving forces behind the boom was cashed refis, employed by landlords who wanted to borrow money to improve their homes and for other purposes. Using withdrawal refis, homeowners essentially transferred whatever they wanted to borrow on their existing mortgages, refinancing the new balance at a lower rate.
But now that rates have risen dramatically, cash rebates are “just not economical for most homeowners,” said Karan Kaul, senior research associate at the Urban Institute’s housing finance policy group.
Still, rising house prices have allowed people to accumulate more equity — and homeowners will continue to use it for home repairs and major life events, like paying for their children’s college education.
“For people who need to leverage their capital, these are the only options they will have going forward,” Kaul said, referring to home equity loans and HELOCs.
Banks have historically been the top sources of HELOCs and home equity loans, and some of them signaled higher demand during their second-quarter earnings calls last month. These banks include Truist Financial, based in Charlotte, North Carolina, HomeStreet, based in Seattle, and Cullen/Frost Bankers, based in San Antonio, Texas.
Cullen/Frost CEO Phillip Green told analysts the bank’s HELOC and Home Equity product pipelines were at “record highs,” according to a transcript from S&P Global Market Intelligence. JPMorgan Chase said in May that it was preparing to offer more HELOC after retiring the product in 2020.
But non-bank mortgage lenders – who have been affected by the downturn in the refinancing market and have announced layoffs – are equally get into the mix. rocket mortgage announcement a new home equity loan product last month, joining rivals such as guaranteed rate and loanDepot in rolling out home equity loans or lines of credit.
The entry of non-banks could make the market more competitive, potentially leading to a slight relaxation of underwriting standards on what has generally been a product with very strict requirements, Kaul said.
According to the Urban Institute report, about 45% of HELOCs issued through the end of May went to borrowers with credit scores above 780. Credit scores on withdrawal refis generally do not need to be so high because they are usually supported by the US government or government-sponsored companies.
While lenders have often demanded pristine credit for HELOCs, they will now have “more incentive to open the credit box” to more borrowers who would benefit, Kaul said.
For now, banks remain “cautiously optimistic” about the credit quality of HELOCs as late payments have remained subdued, said Ken Flaherty, senior consumer loan market analyst at the consultancy. Curinos. But they are watching for any signs of stress, which could be triggered by inflation, higher interest rates or a possible recession, according to Flaherty.
Despite those concerns, Flaherty said home equity loans should continue to “thrive” as higher mortgage rates make them a much more attractive option than cash refis.
Even if house prices stagnate or slow, homeowners are still “sitting on a ton of equity” they’ve accumulated over the past few years of rising prices, he said.
“These homeowners looking to put in this pool or pay for college or for whatever reason dip into their home equity, they come to the banker and say, What are my options? said Flaherty. “And a HELOC makes the most sense, even if it’s a higher rate today compared to a few years ago.”