Mother lode of tappable equity remains, even amid economic challenges

Tappable home equity continues to grow, reaching an all-time high of $20 trillion

Mother lode of tappable equity remains, even amid economic challenges

The TransUnion Credit Industry Insights Report released on Thursday revealed mortgage loan findings amid the mercurial market, chiefly pointing to an abundance of tappable home equity still remaining even in a climate of rising rates and inflation.

Rising interest rates and limited housing supply have caused the mortgage origination market to slow with volumes declining to 2.9 million originations in Q4 2021 – a 28% year-over-year decrease but a number still well above the 2.3 million observed pre-pandemic in Q4 2019, according to the findings. Rate and term refinance originations dropped dramatically by 58% year-over-year, resulting in the continued increase of purchase share of originations for the third consecutive quarter up from 47% in Q4 2020 to 56% in Q4 2021, according to the report.

Tappable home equity, however, continues to grow and reached an all-time high of approximately $20 trillion in Q4 2021, according to the TransUnion report. Additionally, homeowners are showing sustained interest in taking advantage of the equity they have built with total home equity originations up 4% year-over-year and 80% from 2018 to 1.2 million. Within home equity originations, cash-out refinance decreased by only 6% year-over-year while HELOC grew 31% year-over-year in Q4 2021 and 13% year-over-year for a Home Equity Loan, TransUnion analysts found. Rising home prices have also pushed the average loan size of new mortgages to $315,543, an increase of 7% year-over-year, the study found.

“When I think about home equity, I tend to think of this as a two-part story,” Joe Mellman, senior vice president and mortgage business leader at TransUnion, said during a telephone interview with Mortgage Professional America. “The first part is, yes, originations are down because interest rates are up and refi – in particular rate and term refinancing – is down and we all knew that was going to happen. And we’re starting to see that, and it’s a normal part of the cycle.

Read more: Does refinancing a mortgage impact your credit score?

“But what the more optimistic message to lenders is that there are ways to mitigate that and find business outside of rate term refinancing, and home equity is one of those areas that has really shined through, particularly in the past few quarters. At the top level, that $20 trillion of tappable equity that consumers are sitting on is an astronomical sum. And I want to emphasize that is not even total home equity but tappable home equity. And we looked at that looking at every single consumer from the bottom up and how much home equity they would have after they met up to a max 80% CLTV [combined loan-to-value].”

Even from that permutation, the findings are stunning: “Consumers are sitting on a massive amount of home equity, that’s the first point,” Mellman said. “The second point is they’re showing a clear interest in tapping that home equity. If you look at the amount of home equity – the amount of home equity loans consumers have tapped since pre-pandemic to now – it’s risen 80%.”

Bottom line: Despite current challenges, consumers remain well-positioned from a consumer credit perspective, according to the report. Even amid the peak of the COVID-19 pandemic, consumer performance remained relatively strong as stimulus funds, forbearance and accommodation programs provided consumers with a safety net during a period of great uncertainly, the report found. Now that the pandemic-related financial programs have ceased, new challenges – such as inflation and rising interest rates – are starting to have an impact on consumer spending power.

To be sure, consumer spending has not yet recovered to pre-pandemic levels as prices keep increasing. The Credit Industry Insights Report found that in Q1 2022 the average credit card balance hovered around $5,010. While this was a 4.7% increase over Q1 2021 ($4,784) it still lagged 11% behind the average balance in Q1 2020 ($5,637). Total credit card balances for the industry are $769 billion, which is 5.5% below the $814 billion observed in Q1 2020, the study found.

Read next: How many US homeowners are applying for mortgage refinancing?

In addition to consumer spend approaching pre-pandemic levels, consumer liquidity also remains stable. Aggregate excess payment (AEP) – the excess amount a consumer makes over the minimum amounts due on all their credit accounts – is typically an indication of consumers’ ability to manage their overall debt payments. In Q1 2022, average AEP was $328, remaining relatively flat from the $326 observed in Q1 2021. The current level remains above the average AEP levels seen pre-pandemic, TransUnion analysts found.

Mellman acknowledged the study focused on activity up to Q4 last year, but sees similar trends continuing. During the study’s time focus, rate and term loans were down 58% and 6% for cash-out. “There’s still a clear demand for tapping home equity,” Mellman said. “As we fast-forward to more current times, what I would expect to see is cash-out down even further, but I suspect we’re going to see that definitive interest.”

Whether they are suffering a pandemic hangover, fear tapping into their home equity or simply aren’t financial savvy and another financial transaction isn’t at the forefront of their minds, Mellman suggested there is a mother lode comprising consumers not yet tapping home equity.

“Again, these are consumers that haven’t acted on their own, and so it’s going to take a little more work on the lenders’ side to identify them and educate them,” he said. “Even though refi is absolutely dropping, there are still pockets of opportunity with millions of consumers that can still benefit.”