There’s good news and bad news for mortgage originators who aim to offer assistance to cash-strapped homeowners during the ongoing coronavirus pandemic.
First, the good news: According to Black Knight, the amount of tappable home equity across the U.S. as of first-quarter 2020 increased by 8% year over year to a record-high $6.5 trillion. And 90% of the homeowners who have tappable equity — defined by Black Knight as the equity a homeowner could borrow against while maintaining at least 20% equity in their property — had interest rates above the prevailing market average at that time.
The bad news, however, is that Americans accessed their equity less frequently during the first three months of this year, when the economic impacts of shelter-in-place restrictions and business closures hadn’t fully taken hold. Black Knight noted that the share of refinance borrowers who took cash out dropped to 42% in the past first quarter, the lowest percentage since first-quarter 2016, while the volume of equity withdrawn via cash-out refinances dropped by 8% compared to fourth-quarter 2019.
For some originators, cash-out refinances are comprising even smaller shares of their loan volume. Brian Minkow, a Southern California-based producing divisional vice president for Homebridge Financial Services, estimated this past July that about 20% of his refi volume was of the cash-out variety. Clients who have recently utilized a cash-out mortgage are typically doing home improvements, or paying off debt such as student loans or credit cards, Minkow says.
He notes an obvious impediment to accessing equity during a recession: Homeowners who are unemployed won’t qualify for these types of loans. But for someone looking to reduce their monthly expenses, a traditional refinance could provide similar relief.
“There are people saving $300, $400, $500, even $800 a month by lowering their interest rate,” Minkow says. “That’s a cash-out refi in itself.”
In a report released last year, the Mortgage Bankers Association (MBA) said that U.S. home equity soared from $6 trillion during the Great Recession to more than $15 trillion by the end of 2018. But outstanding home equity debt was slashed in half during that time, dropping from $1.1 trillion to about $500 billion. Last year’s origination volume for home equity lines of credit (HELOCs) was $180 billion, well below the $300 billion-plus peak from 2004 to 2006.
There are people saving $300, $400, $500, even $800 a month by lowering their interest rate. That’s a cash-out refi in itself.
—Brian Minkow,
Producing divisional vice president,
Homebridge Financial Services
Marina Walsh, the MBA’s vice president of industry analysis, says there are multiple factors working against the origination of home equity debt. These include unsecured debt options with relatively shorter approval periods, a general lack of competitive technology for banks that offer HELOCs, and even the diminished tax advantages of home equity debt following the passage of the Tax Cuts and Jobs Act of 2017.
“There are a lot of online fintech lenders who can offer pretty decent rates in a very quick amount of time,” Walsh says. “That has been a really big challenge … because traditionally, a lot of HELOC products are originated through banks and bank branches.”
Credit availability across all loan types has declined since the onset of the pandemic. From February through June of this year, the MBA reported that credit supply dropped by more than 30%, including an 18% decrease for government loans and a 57% decrease for jumbo loans. On a monthly basis, the MBA’s credit-availability index dropped by 3.3% in June 2020 to its lowest level in more than six years.
So, it stands to reason that inherently riskier equity-based loans are having difficulty being funded. Additionally, borrowers with an existing HELOC aren’t necessarily utilizing it. Walsh notes that, at the end of 2019, the share of HELOC accounts with no balance was 27%, a figure that has consistently risen since 2016.
Minkow says he’s aware that some lenders have tightened their parameters for cash-out refinances or even eliminated these programs. “If the borrower has a really low loan-to-value (LTV), call it under 60 [percent] … what risk does the lender have if the LTV is 60?” Minkow asks. “Not much, so I just think a lot of lenders are really getting very shy of doing loans when there are so many loans that just make sense. Why would you not do a loan that makes sense?”
Older Americans tend to have more equity in their homes and are generally stronger candidates for various equity-based loans. An October 2019 report from The Brookings Institution found that “rates of new home equity borrowing among older adults are lower than predicted by economic theory.” Among homeowners ages 55 and older, 80% of those surveyed in 2016 stated they were “not at all interested” in using their home equity for retirement purposes.
These homeowners, even if they are interested in tapping their equity, may face financial obstacles to doing so. Brookings noted that the percentage of 55-and-older homeowners whose housing costs exceed 28% of their income — a commonly accepted underwriting standard — is “substantial and has been increasing over time.” Brookings also noted that the share of borrowers ages 65 and older with existing mortgage debt rose from 20% in 1992 to more than 40% in 2016.
“In general, folks aren’t moving and seniors are staying in place,” Walsh says, “so there could be some need associated with retrofitting the house for senior living. … It’s also a question of whether they need to tap into it through a home equity loan or whether they have alternative sources for financing those potential home improvements.” ●
