The mortgage refinancing boom may be over, but it's not all bad news for home lenders.
Thanks to a confluence of factors, many banks and credit unions are predicting a surge in originations of both home equity loans and home equity lines of credit in 2017. Regional bank companies PNC Financial Services Group in Pittsburgh and Zions Bancorp. in Salt Lake City both said that recently that they expect income from home equity lending to increase this year.
Driving the demand, bankers said, is that homeowners finally seem ready to take advantage of the appreciation in home values and pull the trigger on home-improvement projects they have been putting off, said Logan Pichel, the head of consumer lending at Regions Financial in Birmingham, Ala. "People are looking at their homes and saying, 'I haven't done anything to it in seven or eight or 10 years,'" Pichel said.
Another contributing factor is that banks are carrying relatively low balances of home equity loans, so they have plenty of room to originate new loans. And though it may seem counterintuitive, rising interest rates could also result in higher demand for home equity loans or lines of credit. With mortgage rates rising, some homeowners may opt to tap into the increased equity in their homes to build an addition rather than look to buy a new home.
"They've been sitting on projects for years and now they have equity that they can tap into," said Shaun Richardson, senior vice president of products at Icon Advisory Group, a data analytics provider in Dallas.
To be sure, banks' home equity balances have been dropping for years. Many homeowners consolidated home equity loans into first-lien mortgages to take advantage of historically low rates and banks often didn't replace the loans with new ones. Also, the end-of-draw period is approaching, or has passed, for many home equity lines originated in the pre-crisis years using looser underwriting standards. Banks have allowed those HELOCs to run off, to "cleanse their portfolios," Richardson said.
Yet demand is picking up. Though home equity originations are at about half their pre-crisis levels, originations have increased by 38%, to $22.6 billion, over the last three years at a group of banks that Icon surveys that represents about three-fourths of the home equity market. The $63 billion-asset Zions reported that home equity loans increased 9% in the fourth quarter from a year earlier and Chief Financial Officer Paul Burdiss said on a Jan. 24 earnings call that company wants to continue expanding the portfolio.
One big change banks are seeing is borrowers increasingly using home equity lines for carefully planned projects rather than splurge purchases, Pichel said.
It used to be that consumers would use home equity proceeds for nearly anything, including a new car or to pay for college. But increased regulation has lengthened home equity loan closing times, and online lenders can approve an application in a day or less. Thus, there's no need to wait 45 days to get a $10,000 home-equity loan to pay for a vacation in Tahiti.
But for a $75,000 loan to finance a new kitchen, consumers are willing to wait longer to close a home-equity loan because the rates are cheaper, Pichel said.
"HELOCs are not for those who need quick money," said Rutger van Faassen, vice president of lending at Nomis Solutions, a provider of lending software in San Bruno, Calif.
The $126 billion-asset Regions partnered with GreenSky, an Atlanta provider of technology for online lending, to complement its home equity lending, specifically for that reason, Pichel said. GreenSky offers quick approval rates for smaller loans, while Regions retains the business for larger loans.
"More homeowners are thinking twice about using their home equity value to fund things they don't need," Pichel said.
While banks' home equity balances have dropped for years, the opposite has been true for credit unions. Total home-equity lines of held by credit unions rose 90% to $325 billion from the end of 2007 through Sep. 30, 2016, according to FedFis, an Austin, Texas, provider of data on the financial industry.
The $5 billion-asset Patelco Credit Union in Pleasanton, Calif., originated $125 million of home equity loans and lines of credit in 2016 and it expects that number to increase to about $188 million this year, said Vince Salinas, vice president of lending.
Patelco is especially well-positioned to capitalize on consumers' increased interest in borrowing, Salinas said. "We have three of the least-affordable real estate markets in the country," Salinas said, referring to San Francisco, Silicon Valley and the East Bay region of California. "That has to be a factor for our members who are looking to buy another home. Instead of moving, they are more likely to going improve what they already have. HELOCs are the most effective way to do that."
Rising interest rates could spur more originations of home equity loans in other markets as well, Pichel said.
Families that want bigger homes probably shouldn't move if they recently refinanced to a super-low-rate mortgage, said Regions' Pichel. A better option would be to stay in the current home and take out a home equity loan to pay for a new bedroom and bathroom.
"When you're locked into that [sub-4% rate], you're not moving," Pichel said.