Sometimes biting the bullet to build out that bonus bathroom is better than banking on a bigger house. Now still appears to be one of those times.
High property values coupled with soaring interest rates this year have had borrowers continuing to turn to their home equity and lenders vying to capture all the originations they can.
The National Credit Union Administration (NCUA) reported a rise in home equity lines of credit (HELOCs) in 2023. So much so that NCUA Chairman Todd Harper expressed concern, citing higher default rates and increases in credit card balances.
On the other hand, property data provider ATTOM’s June 1 Residential Property Mortgage Origination Report reflected a 25.3% decrease in HELOC loans in Q1 of 2023, compared to Q4 of 2022. However, HELOCs still comprised 19.6% of all loans originated in Q1, four times that of the early part of 2021.
While Q2 data had not yet been released by the time this article went to print, Spring EQ CEO Jerry Schiano told Mortgage Banker Magazine that it’s still a home equity landscape and not a cash-out refinance arena.
“Americans can always benefit from consolidation and also sometimes need more cash,” he says. “The vehicle that they’ve used in the past has been cash-out refinances … really not a smart economic decision for consumers when mortgage rates are (this high).”
Homeowners opting to borrow large lump sums from their home’s equity at a high interest rate can still retain their first mortgage’s original lower rate.
“For them to borrow $50,000 and take out a 9% loan for that and keep their 2.5% loan makes all the sense in the world,” Schiano says. “So I think it was predictable that home equity lending would rise.”
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Providing Value
WFG Enterprise Solutions offers a suite of products specifically for home equity lending. Senior Vice President Dan Bailey says he is thankful for the recent uptick in home equity business.
“Since home values have risen, people have gained a lot of equity,” Bailey points out. “So now it’s time to use it. And I think in this interest rate environment as well. Rates are really high, especially for refinance. People are staying in their homes or fixing up their homes, and they’re using their equity as they choose.”
This is in contrast to the housing market during the height of the COVID-19 pandemic when interest rates dropped to historic lows and refinance was the name of the game.
“Now we’re in a little bit of a weird spot where interest rates are not so low. People have value, so they’re using home equity. And I think a lot of lenders are trying to figure out - really can they and how do they participate in home equity lending?”
While HELOCs and HELOANs don’t offer the same revenue of other home loans, these products do offer lenders the chance to profit from past clientele.
Jerry Schiano
“There’s always gonna be some form of movement in home and purchase, but there’s also a lot of people who, for right now, it pays to sit,” Schiano says. “Call them up and see how they’re doing. You like your house, but would you like to put on something? It’s a good time for home equity.”
It’s up to a loan officer to provide value to their customers, both past and present. Oftentimes that can mean offering a product or service they didn’t know they needed.
“I’m a big believer that you should put people in a product that you would buy with them,” Schiano says. “A HELOC or HELOAN is not good for everybody, but it’s good for a lot of people, and it’s good for a lot more people today than it was a couple of years ago.”
Right now, lenders are adopting different strategies to capture home equity transactions.
“They’re going to rise to have greater prominence than what they did before,” Bailey points out. “We’ve already seen a lot of fintech firms grab hold. And I think you have a lot of lenders that just aren’t going to participate, to be honest with you.”
“It’s not good for everybody, but it’s good for a lot of people and it’s good for a lot more people today than it was a couple of years ago.”
Jerry Schiano
The Risks and the Players
Consumers should be mindful of a few things before they stick their hands into the home equity cookie jar. One is potential hikes in interest rates, which the Federal Reserve has not ruled out for the remainder of 2023.
Borrowers who opt to use their residence as collateral for loans could face foreclosure if they don’t pay up on time.
“One of the concerns that a credit union may have, if they lent to somebody and their rate was [4.5%], and they paid their bills, and now all of a sudden they’ve gone up to [8.5%], that shock could cause some delinquency for people if it’s not underwritten correctly,” Schiano says, giving an example.
He harnessed 30 years of experience running a variety of different mortgage companies when he founded Spring EQ, which offers customers the ability to access up to 95% of their home’s equity - up to $500,000 - in an average of 21 days with flexible terms.
HELOCs are much smaller than traditional mortgages, so efficiency is everything.
“What our job is as lenders is to lend to people that we think have shown a history of paying and can afford the payments,” Schiano adds. “Where we’re a little different than some home equity lenders is we really focus on the affordability of the borrower and the debt ratio. And we use traditional underwriting as opposed to some home equity lenders that do it based upon algorithms and things of that nature.”
Homeowners seeking equity don’t want to wait a few months. They want their money now.
Dan Bailey
“Speed is of the essence when you’re dealing with home equity transactions,” Bailey says. As a lender you have to make sure that you’re doing it in a very cost-effective manner and you’re doing it with a provider that can adapt to what your requirements are and the speed with which you wish to close your transactions.”
HELOCs are typically second mortgages with variable rates. This can get a borrower into trouble if they haven’t planned for a rate increase down the line.
“I think with a loan officer, they always want to keep the best interest of the borrowers in mind,” Bailey says. “I think each situation they’re presented with is different and as an advisor, they should keep in mind whether or not a HELOC makes sense for that particular borrower or not.”
The majority of borrowers are still enjoying lower rates they’ve locked in - all the more reason to fix up the homes they’re in rather than refinance or sell.
Also, an incentive for lenders to secure the right service provider.
“As volumes grow, they want someone that can scale,” Bailey says. “They want the products that they need. They want experienced providers that can deliver with quality and on time and on a cost-effective basis.”
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Predictions
Year-over-year spending on homeowner improvements is expected to shrink almost 6% by the end of Q2 2024, according to Harvard University’s Joint Center for Housing Studies’ Leading Indicator of Remodeling Activity (LIRA).
“Home remodeling activity continues to face strong headwinds from high-interest rates, softening house price appreciation, and sluggish home sales,” says Abbe Will, associate project director of the Remodeling Futures Program. “Annual spending on homeowner improvements and repairs is expected to decrease from $486 billion through the second quarter of this year to $457 billion over the coming four quarters.”
But home improvements are far from the only thing borrowers can spend their home equity on. Bailey predicts that these loans will continue to increase into 2024 if an expected drop in interest rates proves true.
“Should we see a little bit of a rate decline, I think you could see more home equities,” he says, adding, “I think you’re going to see a lot more refinance transactions as well.”
This article was originally published in the Mortgage Banker Magazine November 2023 issue.
