By SAM GARCIA
A newly released study on home-equity lending found that although new open-end activity is expected to dip this year, a surge is expected in closed-end originations — though both types are expected to strengthen in 2024. Equity positions on the loans continue to improve. Home-equity asset performance has gotten better, and home-secured credit lines have been the best performers.
Open- and closed-end home-equity originations during 2022 were up by 50 percent compared to 2020, according to the Mortgage Bankers Association’s 2023 Home Equity Lending Study. The study was based on a survey of 20 institutions including large banks, community banks and credit unions that collectively originated $37.8 billion last year.
MBA didn’t do a home-equity report in 2021 because of “record-low interest rates, ample first mortgage cash-out refinancing opportunities, and the temporary exit of some larger market participants from the home-equity lending space.”
Average home-equity volume at the participating companies was 16,043 units for $2.099 billion. The total included $1.266 billion in subordinate-lien HELOCs, $0.510 billion in first-lien HELOCs, $0.224 billion in junior-lien HELs, and $0.099 billion in first-mortgage HELs.
New HELOCs represented 57 percent of last year’s home-equity production, while 28 percent were HELOC renewals and refinances. New HELs accounted for 14 percent, and just 2 percent were represented by HEL refinances.
Renovations were the stated usage of proceeds on 65 percent of commitment volume, widening from 60 percent two years earlier and 49 percent four years prior. A quarter used proceeds for debt consolidation or restructure, 6 percent utilized it for emergency and cash management, and 4 percent used it for big-ticket financing like down payments and education.
HELOC originations are managed by the consumer lending division at half of the respondent companies. Management fell within the mortgage division based on a third of responses, and just 6 percent handled HELOCs from a home-equity division. On HEL originations, consumer lending managed 44 percent of originations, a third was handled by mortgage divisions and 6 percent fell under the home-equity division.
FICO scores on HELOC loan commitments averaged 769 in 2022, falling 11 points from 2020. HEL scores also fell, to 752 last year from 768 two years earlier.
HELOC lenders cut three days off the number of days from application to closing to 41.1 from 44.2 in 2020. HEL turnaround was trimmed by nearly three days to 46.7 days.
Last year’s average combined loan-to-value ratio on HELOCs was 51 percent, lower than 54 percent two years earlier. HEL CLTV ratios averaged 58 percent, lower than 65 percent in the previous study.
Valuations on properties securing last year’s commitments were determined by automated valuation models on 41 percent of the units, including 27 percent that had an exterior or drive-by inspection only and 14 percent with stand-alone AVMs. Nearly a third utilized desktop valuations. and more than a quarter had full appraisals, including 22 percent that and a full interior and exterior inspection and 4 percent that had only a drive-by or exterior inspection only. Just 1 percent utilized broker price opinions.
The report indicated that pull-through for commitments and applications was 56 percent on HELOCs and 44 percent on HELs — an increase from 2020.
A final underwriting approval was obtained on 58 percent of the consumers who applied for a HELOC in 2022, while the HEL approval rate was just 48 percent. Last year’s commitment-to-application ratio was 56 percent on HELOCs and 44 percent on HELs.
Half of loan origination systems utilized for home-equity lending are part of the mortgage LOS, according to the study, widening from 31 percent in 2018. Another 28 percent were part of a bank system or consumer lending platform, sinking from 48 percent four years earlier, while 17 percent are processed through a stand-alone system, a slightly more narrow share than in 2018. The remaining share (total 100 percent) in all cases was attributed to “not applicable” or “other.”
According to the trade group, the average per-unit home-equity production cost was $4,133, slightly more than $4,023 in 2020. Sales costs made up more than a quarter of the 2022 total.
A graph from the report shows that while aggregate home-equity debt outstanding has fallen to $434 billion as of last year from more than $1.1 trillion around 2007, the amount of homeowners’ equity has grown to $30.981 trillion from roughly $13 trillion during the same period.
Eighty-four percent of HELOCs as of year-end 2022 had variable rates, while 22 percent had a balloon. The most widely used index for adjustable-rate HELOCs, the Prime Rate based on the Wall Street Journal, was used on 98 percent of ARMs.
The average FICO score on lenders’ HELOC portfolios was 773 in 2022, and the average HEL FICO score was 750.
Servicing on HELs and HELOCs for half of all respondents is managed by the consumer lending division, while the mortgage division was responsible for 28 percent. A third of home-equity assets were serviced as part of a bank system or consumer lending platform, another third was serviced as part of the mortgage servicing platform, and 17 percent were serviced through a separate stand-alone system.
HELOC delinquency was 0.99 percent last year based on the number of loans, improving from 1.23 percent two years earlier and 2.17 percent in 2018. Included in the latest number was an 0.10 percent foreclosure rate.
HEL delinquency was much higher at 3.40 percent, though that was 5 basis points less than in 2022 and 36 BPS better than four years ago.
Respondents indicated there is still opportunity to prudently expand home-equity lending, and lenders have the ability to profitability manage through the credit cycle, according to the study. Strong credit and operational risk organizations are critical to maintaining a healthy product while minimizing reputation risk.
Renovations were the stated usage of proceeds on 65 percent of commitment volume, widening from a 60 percent share in the prior report. Those surveyed see continued opportunities here. With a mountain of accumulated home equity and no incentive to trade in a low-rate first mortgage to finance another home purchase at today’s rates, “potential move-up buyers will decide to renovate rather than move.”
“Home renovations and remodeling drove demand for home-equity products in 2022, with roughly two-thirds of borrowers citing it as a reason for applying for a home equity loan,” MBA Vice President of Industry Analysis Marina Walsh said in a written statement, later adding, “The housing inventory shortage, combined with home-price appreciation and a low-rate first mortgage, make home renovations an attractive alternative for many homeowners who are looking to improve their spaces. Additionally, a HELOC or home-equity loan is one way to finance big home projects while receiving a tax advantage through the deductibility of mortgage interest.”
Fintech lenders providing unsecured and buy-now-pay-later loans continue to take market share from home-equity lenders, as do equity-share transactions. Also, the entry by fintechs into home-equity lending, as well as the re-entry of larger lenders, remains a threat. In addition, competition from lenders that provide faster turnaround remain a threat for slower lenders.
While the possibility of home-price declines is an ever-present threat, that doesn’t seem likely in the short run. Based on Federal Housing Finance Agency data, MBA expects home prices to briefly dip into negative territory this year then slowly increase, reaching 3.9 percent appreciation by the end of 2025.
HELOC utilization levels remain a concern. The average utilization rate in 2022 was 34 percent, tumbling from 40 percent two years prior and 46 percent four years earlier. On top of that, nearly a third of outstanding lines finished last year with a zero balance.
Lenders are also concerned about no-cost/no-fee models that could push down revenue per unit, and that interest income can retreat and payoffs could accelerate when rates turn lower.
While HELOC volume is expected by the respondents to fall nearly 2 percent this year, a 2 percent increase is expected next year by the surveyed institutions. The outlook is more robust for HELs, with the group predicting a nearly 18 percent surge this year and an almost 3 percent rise next year.
Looking at the nation’s book of home-equity assets, HELOCs outstanding are expected to expand by 8.15 percent this year and 9.87 percent during 2024. An 11.38 percent increase is expected in HEL outstanding in 2023, though they are expected to decline 6 percent next year.
“Given the nearly $30 trillion of accumulated equity in real estate, there is untapped potential for home-equity lending for lenders and borrowers,” Walsh concluded. “Respondents said consumer education, technological innovation, speed to delivery, and tailored products and marketing for specific customer segments are important initiatives for lenders to realize this potential.”