Banks have not been in a rush, thus far, to follow in JPMorgan Chase's footsteps when it comes to putting a hold on home equity line of credit lending. Competitors like TD Bank say they'll continue to offer HELOCs as long as there are quality applications.
Chase, exiting this business, at least temporarily, removes one of the larger HELOC originators from the business: it was the seventh largest by both loan and dollar volume in the fourth quarter last year, according to Attom Data Services.
Changing a lending policy amid a destabilizing event is not without precedent. But, at a moment when similar financial products are coming to market and lenders are generally tightening their credit requirements, Chase's move may be the first indication that the entire home equity finance business could be changed dramatically as a result of the pandemic.
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In the aftermath of the Great Recession and the resulting home price devaluation, many HELOC lenders first cut the amounts on existing lines, then closed unused lines before finally restricting access to the product altogether.
The HELOC share as a percentage of total originations went from 20.3% in the second quarter of 2008 to 8.6% one year later because of the housing market crash.
As home values started to return, so did HELOC use, somewhat. By 2015, the share was in the mid-teens and starting in 2017 reached the upper teens on a consistent basis, before peaking at 20.1% in the fourth quarter of 2018. But the product has yet to overcome being labeled as a cause of the housing crisis because of its overuse by consumers that used their home like a credit card.
Home Equity Line Of Credit Qualification Calculator
The most recent data shows another decline in market share to 13.5% in the fourth quarter of 2019, as mortgage rates began tumbling to what was near record low levels at that time.
But so far, today's situation is different, as early data from Redfin and Remax showed March's home sale prices were relatively stable compared with prior periods.
Today, the fintech community offers alternatives to traditional home equity lending that did not exist at the time of the Great Recession. One such provider is Noah, which purchases an equity position in the home, said Sahil Gupta, the company's founder.
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The fintech firm, which recently raised $150 million to support its investment program, did not disclose who the investors are, but the funding gives it the ability to try and provide more capital to home owners today, especially when banks and other companies are pulling back on consumer lending, Gupta said.
The typical contract period for the investment is 10 years, and in return the consumer does not have to worry about payments and interest rate changes (HELOCs are usually adjustable rate loans).
We are going to share in the risk of home values with you, said Gupta. That means if home values go up, Noah will take a portion of the upside. However, if home values drop we also share in the same proportion of the downside. I think as an institution our promise should be no different in good times and in bad.
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Another advantage is that Noah's funding timelines are much shorter. While HELOCs and home equity loans can take as much as 45 to 90 days to underwrite, Noah can provide funding in 15 to 20 days.
While Noah requires that the person applying for the financing is on the title, it has pretty broad guidelines around credit scores and debt-to-income ratios.
But trying out a new lending product does come with some risk. Take for example Unison, which is a competitor to Noah in the equity sharing business. According to a notice on its website, Unison has stopped accepting applications. It has also laid off half of its staff. A message posted to the site says the company hopes to return, and is planning to create a wait list.
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A third company, Hometap, which raised funds last December to finance its home equity sharing offering, is still active in the market as well.
Another equity sharing firm, Point, posted on its site that there are delays on many of their transactions because of a limited ability to order appraisals, notarize and record documents.
That reliance on investor funding also is a complicating factor in an unstable market, because when things turn negative, this money becomes hard to come by.
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Another fintech, Figure Technologies, founded by former SoFi CEO Michael Cagney, has paused its HELOC lending offering, although it is still offering mortgage refinancings, according to its website.
In addition to staying put in the HELOC market, TD Bank, which Attom ranked as eighth largest HELOC lender by dollar volume and 12th by units, has no plans to exit closed-end home equity lending either, said Jon Giles, its head of home equity lending.
Like many, we have moved some resources to mortgage, based on demand, particularly demand for refinances and cash-out refinances, as that demand remains high, Giles said.
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First-mortgage cash-out refinancings are a competitor to home equity products. But with lenders tightening guidelines, some borrowers that no longer qualify for a cash-out refi could turn to a second lien home equity product.
So, a decline in borrower quality is something TD keeps an eye on, monitoring applications to see what the credit risk trends are.
We have not seen [a drop in applicant credit] yet, so we're confident in the type and quality of the applications that we're getting in today, Giles said.
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It is possible that the credit tightening could draw consumers to home equity products, said Grant Moon, the CEO and founder of Home Captain, a fintech that serves mortgage banks and servicers.
One of the things that happens in a recession is that cash becomes king, Moon said. A lot of people will look to shore up some way of having cash as a safety net to ride through the storm and one of the biggest sources of equity out there today, especially after a 10-year run, are peoples' homes.
However, the credit tightening hurts those consumers that are underbanked, a particular concern of Moon's, because they are the ones who could really use it the most.
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What are the people that want to do a home equity loan now wanting the money for? Is it necessity? Because if it is, [the credit tightening] is an unfortunate thing.As the Federal Reserve increases interest rates in an attempt to lower inflation, a confluence of factors point toward home equity growth opportunities for financial institutions. With dramatic changes in the mortgage market, soaring home values and a shift in market share among institutions competing in this space, what can your organization do to win its fair share of the market opportunity?
Rising interest rates mark the unofficial end to the refinance boom initiated at the start of the COVID-19 pandemic. With 30-year fixed mortgage rates having hovered in the 3% range for much of 2020 and 2021, homeowners refinanced their existing mortgages at unprecedented rates. Refinanced mortgages accounted for 64% and 59% of one- to four-family mortgage originations in 2020 and 2021, respectively. Based on projections from the Mortgage Bankers Association, and with rates increasing, this refinance share is expected to level off at 33% in 2022 and 26% in 2023. In short, the majority of qualified homeowners for whom it would be advantageous to refinance have likely already done so in the last two years.
Another byproduct of the two-year refinance mania is its impact on outstanding home equity balances. At the end of 2019, the Federal Reserve reported $501 billion in outstanding home equity balances. This total had dropped to $396 billion by the fourth quarter of 2021. At least part of this 21% decline can be attributed to consumers consolidating debt and rolling their equity balances into their refinanced first mortgage.
Historical Mortgage Rate Trends
Although the decline in home equity balances accelerated during the pandemic-initiated low-rate environment, it is not a new trend. In fact, ever since the sharp and unsustainable increases in home equity balances in the years leading up to the financial and housing crisis in 2008, home equity balances have steadily declined. While Great Recession–era charge-offs, declining home values and overleveraged homeowners contributed to the initial drop in home equity balances, the ongoing decline suggests there may be more at play in both lenders’ and borrowers’ relationships with home equity loans.
Part of the steady decline since the Great Recession includes a significant shift in the home equity market share controlled by the three largest retail banks. Bank of America, Wells Fargo, and Chase collectively accounted for 40% of all outstanding home equity loan balances in 2010. The same equity market share is only 19% today.
Whatever the reasons for this strategic shift in the loan portfolio mix, it represents an opportunity for other financial institutions to fill the gap. While other banks in totality follow a similar trend line as their big bank brethren, credit unions as a group experienced a 28% increase in overall home equity balances between 2013 and 2019, offsetting the 26% decline seen during the five years prior to 2013. Credit unions have not been immune to
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