HELOC boom intensifies as refinances tank

New data has revealed the extent HELOCs have grown this year as the popularity of refinances plunges in the current high interest-rate environment.

According to mortgage-industry data provider Attom, home equity line of credit volumes increased 6% in the first quarter this year versus the final three months of 2021, and 27.6% year-over-year to total 249,900. Over 62% of metropolitan areas reported HELOCs increasing from the fourth quarter, with consumers in Western markets, particularly, using them to tap into their home equity.

At the same time, refinances dropped 22% on a quarterly basis and 46% from one year ago in the first quarter to 1.45 million loans, the largest annual drop since 2014.

"The drop-off in Q1 refinancing activity is no surprise with mortgage rates rising as rapidly as they have," said Rick Sharga, executive vice president of market intelligence at Attom, in a press release. 

While far fewer HELOCs are issued compared to refinances, the numbers, which were reported in Attom’s Q1 2022 U.S. Residential Property Mortgage Origination Report, show a still-elevated level of interest among homeowners to take advantage of the surge in home equity over the past two years. According to Black Knight, tappable equity among U.S. homeowners has grown to a record $11 trillion.

Among markets with populations of greater than 1 million, Philadelphia topped the nation in HELOC growth with 26.4% more volume generated in the first quarter compared to the three prior months. The majority of cities leading the list, though, were located in Sun Belt regions that also experienced the most rapid pace of increases in home values over the past year. San Jose, California, recorded 23.7% quarterly growth, followed by Los Angeles at 23%. Rounding out the top five cities were Miami, which saw 22.1% more HELOCs, and San Antonio with 19.6%.

The stars seem to be aligned for HELOCs to be near the forefront of home lending in the foreseeable future, according to Ken Flaherty, senior consumer lending market analyst at Curinos, a provider of data insights and technology to the financial services industry.

“Even with all the recession words being thrown out and some of the economic slowdowns, nowhere have we seen a true decline forecasted for homeowners,” he said in an interview. 

While home valuations might see a deceleration from the pace of the last two years, when it comes to the equity now available, “nowhere do we see any indication of that going away.”

And while equity has accelerated, so have interest rates. Current benchmark rates are now at least 2% higher than their levels throughout most of 2021, and the sticker shock has sent refinances sinking by 75% compared to a year ago, according to the Mortgage Bankers Association. 

With purchase originations also slower than anticipated, companies are actively seeking to find ways to lure in new business. Many are turning to HELOCs, which allow mortgage borrowers to tap into home values while keeping their first-lien mortgage rates, rather than rolling over into current levels. 

Previously the domain of depositories, a growing number of fintechs and other nonbanks also have stepped up to offer home equity products as profit margins among originators has fallen dramatically. In the last two months, loanDepot and New Residential both announced intentions to roll out a home equity product in 2022.

Mortgage borrowers in the past two years hit the market when rates "were truly at historical lows," Flaherty said. Those rates are unlikely to return.

Those customers are going to be the prime focus for servicers and lenders to prioritize when marketing home equity products, he said. “Frankly speaking, they would be crazy to give up that first mortgage rate and do another cash-out refi.” 

Banks that ceased offering HELOCs in the first months of the coronavirus pandemic also may be coming back. JPMorgan Chase recently hinted at its return, but offered no concrete plans or timeline.

HELOCs accounted for 9% of all residential loans In the first quarter, up from 7% the previous three months, and 5% over the same period last year, according to Attom. By dollar volume, lenders generated $50.4 billion of HELOCs, up 8.2% from $46.8 billion one quarter prior and 26.3% from $39.9 billion on an annual basis.