American homeowners removed 2% more equity from their properties year-over-year in the first quarter, the most for the three-month period since 2021, ICE Mortgage Technology found.
It estimated $47 billion in equity was withdrawn in the quarter, down from $49 billion
While the use of second lien products had a slight majority in terms of how equity was accessed, the period also saw significant percentage growth in cash-out refinancings.
The number of borrowers taking a cash-out refi grew 18% compared with
Meanwhile, 248,000 homeowners opted to tap equity via a second lien, withdrawing $25 billion, a gain of 1%.
The "lock-in effect" for pandemic-era borrowers whose rates are still well below the current market, drove the growth in second lien products. Nearly two-thirds of the home-equity product volume in the first quarter came from borrowers who took out a first mortgage between 2020 and 2022; a total of 3.9 million people who have a mortgage of those vintages added second liens, ICE Mortgage Technology said.
But the cash-out borrowers came from a broader range when it comes to their original loans. Nearly half of them got their last first lien in 2023 or later, while one-quarter was from the 2020-2022 period.
Rates for second lien home equity lines of credit fell to 6.6% in March, which ICE said was the most attractive for the product since late 2022. The average introductory HELOC rate fell slightly below the prime rate, which it attributed to increasing aggressive lender competition for this business.
The data does not include any home equity product originated as a first-lien. It only includes loans with an existing first which now have a second lien as determined through linking McDash data from ICE with public records.
When it comes to extracting equity, historically cash-out refinances have led the way, said Andy Walden, head of mortgage and housing market research for Intercontinental Exchange.
"We've been in kind of the most predominant second-lien era that we've seen over the last 20 years," Walden said in an interview. "Since 2022, it's been running above 50% seconds for all the reasons that you expect, trying to hold on to those low rate firsts that they took out in '20 and '21."
Right now, the market is at the higher end of the spectrum in terms of second lien utilization.
The high point was in the third quarter of 2024 at 58%, with the first quarter of this year at 54% second-lien share. Historically, the split was around 60%-40% in favor of cash-out refinanices, Walden said.
Home equity lending activity is likely to slow going forward. This is in part because home price growth has been slowing, meaning less of it can be tapped, Walden said.
It's worth keeping an eye on rates for second-lien products. Many HELOC lenders index these loans to the prime rate. When the Federal Open Market Committee changes the Fed Funds Rate, many banks will in turn raise or lower their prime rate by the same amount.
Latest bets regarding the FFR have shifted to a 70% probability that
This will put pressure on HELOC rates. Looking at the spreads for HELOCs right now they are slightly below prime on average, "so they're already being aggressive," Walden pointed out. An increase by the Fed could eat into home equity lending growth.
But the spread between HELOCs and the 30-year fixed could remain relatively tight, which could keep homeowners more interested in second lien products rather than cash-out refis, ICE said.
ICE noted rising interest rates since the end of February has reduced the number of borrowers who have a financial incentive to refi to 1.8 million as of May 21. This compared with 5.4 million during a brief period when the 30-year fixed fell under 6%.
In current conditions, the 30-year FRM would have to fall below 6.25% to drive a meaningful rebound in refi volume. For the week of June 4, the 30-year was
Cash-out refi apps had a 65% share in late May versus those homeowners seeking new mortgages for rate-and-term reasons. This particular dataset ICE is able to obtain from its Encompass loan origination system and thus can see the rate lock activity on a timelier basis.
ICE uses Mortgage Bankers Association weekly application survey and then takes the Encompass rate lock data to make its determinations.
