How the coronavirus is changing the HELOC lending market
Banks have not been in a rush, thus far, to follow in JPMorgan Chase's footsteps when it comes to putting a hold on home equity line of credit lending. Competitors like TD Bank say they'll continue to offer HELOCs as long as there are "quality applications."
Chase, exiting this business, at least temporarily, removes one of the larger HELOC originators from the business: it was the seventh largest by both loan and dollar volume in the fourth quarter last year, according to Attom Data Services.
Changing a lending policy amid a destabilizing event is not without precedent. But, at a moment when similar financial products are coming to market and lenders are generally tightening their credit requirements, Chase's move may be the first indication that the entire home equity finance business could be changed dramatically as a result of the pandemic.
In the aftermath of the Great Recession and the resulting home price devaluation, many HELOC lenders first cut the amounts on existing lines, then closed unused lines before finally restricting access to the product altogether.
"I'm conscious of that happening again," said Todd Teta, chief product officer at Attom Data Services.
The HELOC share as a percentage of total originations went from 20.3% in the second quarter of 2008 to 8.6% one year later because of the housing market crash.
As home values started to return, so did HELOC use, somewhat. By 2015, the share was in the mid-teens and starting in 2017 reached the upper teens on a consistent basis, before peaking at 20.1% in the fourth quarter of 2018. But the product has yet to overcome being labeled as a cause of the housing crisis because of its overuse by consumers that used their home like a credit card.
The most recent data shows another decline in market share to 13.5% in the fourth quarter of 2019, as mortgage rates began tumbling to what was near record low levels at that time.
But so far, today's situation is different, as early data from Redfin and Remax showed March's home sale prices were relatively stable compared with prior periods.
Today, the fintech community offers alternatives to traditional home equity lending that did not exist at the time of the Great Recession. One such provider is Noah, which purchases an equity position in the home, said Sahil Gupta, the company's founder.
The fintech firm, which recently raised $150 million to support its investment program, did not disclose who the investors are, but the funding gives it "the ability to try and provide more capital to home owners today, especially when banks and other companies are pulling back on consumer lending," Gupta said.
The typical contract period for the investment is 10 years, and in return the consumer does not have to worry about payments and interest rate changes (HELOCs are usually adjustable rate loans).
At the time of redemption, either through a property sale or repayment, that equity position determines Noah's return on the transaction.
"We are going to share in the risk of home values with you," said Gupta. "That means if home values go up, Noah will take a portion of the upside. However, if home values drop we also share in the same proportion of the downside. I think as an institution our promise should be no different in good times and in bad."
Another advantage is that Noah's funding timelines are much shorter. While HELOCs and home equity loans can take as much as 45 to 90 days to underwrite, Noah can provide funding in 15 to 20 days.
While Noah requires that the person applying for the financing is on the title, it has pretty broad guidelines around credit scores and debt-to-income ratios.
But trying out a new lending product does come with some risk. Take for example Unison, which is a competitor to Noah in the equity sharing business. According to a notice on its website, Unison has stopped accepting applications. It has also laid off half of its staff. A message posted to the site says the company hopes to return, and is planning to create a wait list.
A third company, Hometap, which raised funds last December to finance its home equity sharing offering, is still active in the market as well.
Another equity sharing firm, Point, posted on its site that there are delays on many of their transactions because of a limited ability to order appraisals, notarize and record documents.
However, all are subject to the same market forces and risks on property values that traditional home equity lenders are.
That reliance on investor funding also is a complicating factor in an unstable market, because when things turn negative, this money becomes hard to come by.
Another fintech, Figure Technologies, founded by former SoFi CEO Michael Cagney, has paused its HELOC lending offering, although it is still offering mortgage refinancings, according to its website.
Tighter lending guidelines
In addition to staying put in the HELOC market, TD Bank, which Attom ranked as eighth largest HELOC lender by dollar volume and 12th by units, has no plans to exit closed-end home equity lending either, said Jon Giles, its head of home equity lending.
"Like many, we have moved some resources to mortgage, based on demand, particularly demand for refinances and cash-out refinances, as that demand remains high," Giles said.
First-mortgage cash-out refinancings are a competitor to home equity products. But with lenders tightening guidelines, some borrowers that no longer qualify for a cash-out refi could turn to a second lien home equity product.
So, a decline in borrower quality is something TD keeps an eye on, monitoring applications to see what the credit risk trends are.
"We have not seen [a drop in applicant credit] yet, so we're confident in the type and quality of the applications that we're getting in today," Giles said.
It is possible that the credit tightening could draw consumers to home equity products, said Grant Moon, the CEO and founder of Home Captain, a fintech that serves mortgage banks and servicers.
"One of the things that happens in a recession is that cash becomes king," Moon said. "A lot of people will look to shore up some way of having cash as a safety net to ride through the storm and one of the biggest sources of equity out there today, especially after a 10-year run, are peoples' homes."
So far none of Home Captain's 40 bank and mortgage servicer partners has told Moon they were exiting home equity lending.
However, the credit tightening hurts those consumers that are underbanked, a particular concern of Moon's, because they are "the ones who could really use it the most.
"What are the people that want to do a home equity loan now wanting the money for? Is it necessity? Because if it is, [the credit tightening] is an unfortunate thing."