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Equifax economist: Don't expect a HELOC boom

Despite record home equity levels, originations for home equity lines of credit (HELOCs) got off to a slow start to begin 2018, with new HELOC line originations through February dropping 5.4 percent, compared to the first two months of 2017, Equifax reported. Home equity installment loans were up by 14 percent for the same period, Equifax data suggests. Gunnar Blix, Equifax’s deputy chief economist, offered his insights into where the home equity trends are headed. 

homeequityHave home equity lines of credit (HELOCs) and home equity loans been trending up or down?

HELOCS, according to us [Equifax], were slow in the first two months [of 2018]. A lot of that could be related to storms going up the East Coast, Nor’easters and so forth. So, maybe we got a bit of a slower start from that market. We would expect that HELOCs will become more popular as rates go up. People, rather than refinancing with a new first mortgage at 4.5 percent, might take a HELOC to tap any equity in the home to do a remodeling project.

It is also an environment, where, because the rates are going up and HELOCs tend to be adjustable rate products, maybe home equity loans are a better option for some than HELOCs per se. It is a little early to tell what exactly is going to happen with that market.

Why would home equity loans have the upper hand?

A fixed rate is something that people look for when they think rates are going up. That is part of it. The new tax rules [that reduced the tax benefit on home equity lines for those who itemize] may have some impact, but we don’t think it will have a huge impact. There are relatively few people who itemize. As long as you are using a HELOC for a home improvement purpose, a HELOC is just as deductible as a home equity loan. Definitely in a rising interest rate environment, equity loans become more attractive relative to refinancing a first [mortgage].

Are people still doing a lot of cash-out refinancing?

There has been some. In fact, the [the Mortgage Bankers Association application] report that came out was showing that refinance applications were coming back up again. There is still some refi going on, some cash-out refi going on -- refinance to get rid of mortgage insurance, if you started out with an 85 percent to 90 percent LTV [loan-to-value] FHA loan. In order to get rid of the mortgage insurance on the FHA loan, you actually have to refinance [into a conventional loan]. We expect that purchase is going to overtake refinance. It is going to stay that way as long as the rates keep going up. We will have occasional dips where people will rate-and-term refi as well when we see rates going down in dips.

Given that home equity levels are at record levels, do you expect a surge in HELOCs and home equity loans?

Lenders have been fairly careful. There is still very tight underwriting standards on that. I think we will see more of it as rates go up. I don’t think we will see a massive surge of HELOCs. I am not quite sure what to think on the home equity loan side. It is attractive right now, but we haven’t seen a big surge on that side either.

So, basically, no repeat of the wave of HELOCs like in the last market boom?

My sense is that [the current level of originations] is a lot lower than it was pre-recession. Part of that is the underwriting standards. We have seen the credit score on HELOCs, in particular, go way up relative to what it was prior to the Great Recession. With home equity loans, there is still some subprime going on. Piggy-back loans are almost completely gone compared to where they used to be before the crisis. That is because you can’t easily get a HELOC or a home equity loan with very high LTVs. So, I don’t really expect a repeat of what we saw before the crisis. There are many factors playing into that. Another factor on the home equity line credit side [relates to] the interest-only draw period. New HELOCs either have a very short interest-only draw period of, say, five years, or require you to make amortizing payments from your first draw.  

Do you have any sense of people are using these for?

Home improvement, certainly. Consolidating debt — I think a lot of that has gone to the consumer-finance fintech space [lenders in the financial-technology services sector]. The other thing that was frequent before the crisis, which is not frequent now, is using it for education loans. So, I think it is more directly toward home-improvement-type projects. Compared to the crisis, we see the initial draw with HELOCs happens much sooner. It looks like people are using HELOCs for a purpose. They are not really using it for a line of credit. It is not a rainy day fund anymore. There are other options out there for that.

Just switching the topic, given the intense competition out there to make loans, are you seeing any evidence through your FICO data that credit is loosening more rapidly?

We see pockets of it. We don’t see it as a big trend. It really tends to be isolated to certain lender types. For instance, on the auto side, banks and captive auto [lenders] are still very conservative, but there are still things going on in independent finance and dealer finance. You see similar things happening on the consumer-finance side with the fintechs, but some of them are out there trying to make money off of more subprime borrowers. It is still a lot shy of what it was 10 years ago.

Is there any one trend in the mortgage space that stands out in the data you are collecting?

The overall market is still slow on the purchase side. We still have an inventory squeeze going on. The inventory that is out there tends to be skewed toward the upper end of the market, not the lower end of the market. So, we have a problem with first-time homebuyers being able to get into the market. A lot of what we are seeing in the credit trends is in response to that.

We are seeing first-mortgage delinquencies at historic lows. We are seeing HELOC delinquencies very low. We are really not seeing any signs of stress in those markets, mainly because they are predominantly prime markets. On the home equity loan side, there is a little bit more subprime going on there, but not anything that we would be concerned about. That is still a very low-risk market. Unfortunately, I think it comes at the expense of consumers that want to get into the housing market while rates are low. They really can’t find something to buy that is appropriately priced, and that is affordable, that they can live with for the longer term. 


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