Home equity lending likely to remain constrained through 2020: MBA

Home equity lenders expect origination activity to remain dreary through next year even as consumers can access more potential proceeds now than in 2006, a Mortgage Bankers Association survey found.

Home equity line of credit originations are expected to drop 3.8% in 2019, although they should increase 3.4% in 2020. However, closed-end home equity loan originations should increase 7.8% this year and 8.4% next year.

"Many households are not tapping the equity in their homes, despite the significant rise in home equity since the Great Recession, wage growth, and low unemployment," Marina Walsh, the MBA's vice president of industry analysis, said in a press release. "Our study found that lenders do not anticipate a significant ramp-up in activity through 2020 because of various challenges, including other viable consumer financing alternatives, pricing pressures and competition, and rising costs. Furthermore, changing borrower sentiment and confusion over tax deductibility appear to have contributed to lackluster lending activity in recent years, as well as muted expectations going forward."

This is a change in outlook from nearly one year ago, when Ellie Mae updated its Encompass loan origination system in anticipation of a possible surge in home equity lending as first mortgage rates were expected to increase throughout this year.

Home equity mortgage debt outstanding was over $500 billion at the end of last year, down from $1.1 trillion at its peak in 2007. At the same time, home owner's equity has increased from $600 billion during the Great Recession to $1.1 trillion as of Dec. 31, 2018, according to the MBA report.

There were 27 companies that participated in the MBA survey, which originated $64.7 billion in commitments last year; HELOCs were 88% of that total.

Among the deterrents to growth is the reputation that home equity lending got as a result of the Great Recession. Then there is competition, not only from unsecured products being offered through fintechs or credit card lenders, but also from increased consumer interest in cash-out refinancing of first lien mortgages spurred by falling rates.

Home equity products are more costly to originate and service than first mortgages.

While the average cost to originate a first mortgage was at $8,300 a loan in 2018, the average cost to originate an open end or closed end second-lien loan was at $2,338 per loan, this study found; but principal balances were also lower, reducing the per-loan revenue.

The average fully loaded cost to service a first mortgage was $225 per loan in 2018. The average cost to service either an open-end or closed-end second-lien product was $241 per loan in 2018. Participants fear technology investments, compliance requirements, and increased delinquencies due to a potential economic slowdown could drive those costs even higher, the MBA said.

More than half of initial consumer contact for a home equity product came through a bank branch's retail staff, while just 13% came through a mortgage loan officer. The internet was the first point of contact for 11%, while the bank's call center was for 10% and a mortgage call center was for 8%.

HELOC originations had an average combined loan-to-value of 57%, while for closed end loans, the CLTV was 66%. On a standalone basis, HELOCs had an average LTV of 28%, while for home equity loans, the average LTV was 37%.

Borrowers with open-end home equity products had a higher average credit score than closed-end second liens did, and higher average credit scores than the full universe of first-lien borrowers. The average scores for each were 762, 749 and 728 respectively.

The delinquency rate for HELOCs was 1.82%, compared with 3.3% for home equity loans and 4.32% for first mortgages.