Company scrambles to keep pace with demand
With the refi wave now all but in the economic rear view mirror, the twin pistons of home equity loans and home equity lines of credit have emerged to propel lenders forward. Both funding sources have soared 41% over the past year, according to TransUnion, even as overall mortgage originations have dipped by 35% during the same period.
Mortgage Professional America spoke to Ed Austin (pictured), chief operating officer of SingleSource Property Solutions, where staff members are scrambling to keep up with demand – an enviable position amid an inflationary market currently being doused by the Fed with increased rates to stem the tide. At SingleSource, Austin told MPA, volume in equity loans and HELOCs are up 75% from the same period last year.
“The home equity business has been relatively flat since 2008 to 2010,” Austin told MPA. “We’ve seen some little spikes but nothing like we’ve seen in the last year. It was kind of the perfect environment. Home prices were going up all over the country at a very fast rate, you had rates that were low – that have now started to go up – which also slowed the refinances down, setting up the perfect storm for home equity to come roaring back. We’re seeing higher rates and higher property values so now the people that have the equity in the homes or that qualified for a first [mortgage] are now using the value in their homes to qualify for the second because of property values. That’s really what’s led to this.”
The uptick in equity loans is part of a broader trend marked by greater access to credit. According to TransUnion, the first half of 2022 concluded with a normalization in serious delinquency rates to pre-pandemic levels for most credit products as lenders continued to expand access to credit cards and personal loans. Highlighted in the credit ratings agency’s newly released Q2 Quarterly Credit Industry Insights report, the number of consumers with credit cards and personal loans has now reached record highs – driven by an increase in loans to non-prime consumers.
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In the report, TransUnion’s vice president of US research and consulting Michele Raneri posits the trend as a positive, and welcome, development: “Consumers are facing several challenges that are impacting their finances on a day-to-day basis, namely high inflation and rising interest rates,” she wrote. “These challenges, though, are happening against a backdrop where employment opportunities are still plentiful and jobless levels remain low. We see lenders offering more access to credit to non-prime consumers, some of whom are new to credit. This is a welcome development as more consumers have gained access to credit during a time when high inflation has placed a greater burden on their wallets.”
Better yet, delinquencies have not loomed large in this new environment, she noted: “While delinquencies generally rise after a period when more non-prime borrowers secure loans, the rates of delinquency remain mostly at or below pre-pandemic levels, particularly for cards and personal loans.”
Austin spoke to equity’s appeal: “I think what makes these products more appealing is that over time – over the last dozen or so years – the underwriting, and underwriting in general on first mortgages, has been better,” he said. “Because of the improved underwriting requirements, it’s less risk for lenders to get back into the home equity space. The biggest driving factors were mortgage rates increasing and property values increasing so fast over the last few years.”
He noted similarities with refinance: “The home equity rates are generally fairly consistent with finance,” Austin said. “They kind of follow the same path. But again, for a lot of people that are qualified and the rates are too high, they’re going back and tapping into the equity they’ve received over the last few years -- just the fact that property values went up so greatly in the US, it’s been kind of crazy how much property values went up.”
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The current equity trends also showcase major advantages junior lien lenders have over first mortgage lenders, Austin agreed. “The home equity is where you get into the junior lien,” he noted.
“You’ve got a property that’s secured by the first mortgage and the borrowers are using that equity in the home to secure the second mortgage. That’s really the product in and of itself. So if people aren’t refinancing to take cash out of their home, they can get a better rate on doing a 10- or 20-year line of credit. That seems to be a better place for most folks right now.”
Despite such ease and access, not all are on board. Recent studies have shown that older borrowers tend to be averse to tapping into equity – perhaps due to the “second mortgage” tag to the transactions. Many in the older generation saw the erosion of the Great Recession when an untold number of borrowers’ mortgages literally sank underwater and may not be aware of bolstered regulatory oversight implemented to prevent such a scenario from occurring again.
“A lot of folks took losses on second mortgages because the first mortgages probably were overinflated back then,” Austin said. “Maybe underwriting requirements weren’t as good or maybe we as an industry didn’t do a good enough job of underwriting those files.”
But it’s a new day, he suggested: “If you’re a bank or credit union and you have the same customer base and you have the first mortgage, you’re pretty comfortable with the borrower, with their credit profile. I think that’s where the risk is lessened, quite honestly, because you have history with those customers. The risk profile for those folks is a lot less.”
Notwithstanding resistance from the older set, business is booming: “We’re probably, as of last month, 75% ahead in our home equity business to where we were at the same period last year,” Austin said. “We’ve seen more, literally, in the past four months. We’ve really seen the numbers start to take off.”
Despite the traditionally cyclical spikes in equity tapping and the historical slowdown in late summer, the upward trend shows no signs of letting up anytime soon: “This year, we’ve seen the demand continue to increase,” Austin said.