Like rust, change never sleeps, and there’s big change happening in the lending industry. As home values and first-mortgage rates continue to rise, borrowers are starting to shift away from high-rate, cash-out refinancing to meet their financial needs and toward second-mortgage home equity lending, such as home equity lines of credit (HELOCs).
Make no mistake. The refinance market is poised for a strong reset toward second-mortgage home equity lending, particularly HELOCS, and away from cash-out refinancing — which replaces an original mortgage with a new one while allowing borrowers to cash out their equity.
As a mortgage originator, a prudent strategy to prepare for the pivot is to build relationships with tech-savvy nonbank lenders that have experience in the home equity lending market. The growing demand for these products could mean new business opportunities for mortgage brokers who recognize the potential scale of this shift.
The re-emergence of home equity lending has captured the attention of highly respected experts in the financial industry. Take the pulse of the industry and discover that the parallel increases in home values and interest rates are the tailwinds driving home equity lending demand, even as demand for cash-out refinancing plummets.
Strong home-price appreciation has handed Americans an equity windfall. This growth, which has accelerated in recent months, is helping to build wealth in the form of home equity and also bring homeowners with negative equity — also known as being underwater — back to positive equity positions.
The surge in total homeowner equity is being driven, in part, by increasing home prices, which have risen, on average, around 7 percent annually since 2012, according to S&P CoreLogic Case-Shiller data. This growth produced a record $5.8 trillion in tappable home equity for U.S. homeowners, Black Knight Financial Services reports. This is $3 trillion more than they had in 2012, at the end of the financial crisis, when the housing market bottomed out.
“ More lenders and mortgage originators are beginning to recognize that they will need to strap home equity loan products back on their tool belts. ”
In early 2018, some 80 percent of homeowners had home equity they could tap, according to Black Knight. Data from CoreLogic shows that home prices have risen by between 6.2 percent and 7.1 percent on a year-over-year basis each month from January through July of this year, with further price appreciation expected to continue. These figures drive home the need for mortgage originators to pay attention to home equity lending and to begin building relationships with lenders that have experience in that market.
Rising interest rates
The performance of U.S. Treasury bonds correlates directly with the interest rates on fixed-rate mortgages. When Treasury yields rise, so do interest rates. This outcome can influence homeowner decisions, and many could choose to hold fast to their low-rate mortgages versus refinancing up to a higher rate.
Dan Fuss, veteran bond manager and vice chairman of Loomis Sayles & Co., predicts that the 10-year Treasury yield will rise beyond 4 percent within two years. Barring any major disruptions that rattle the economy, he also expects that the U.S. is in for an extended period of rising interest rates.
Mortgage Bankers Association data shows that some 80 percent of available equity is held by homeowners whose current mortgage interest rates are under 4.5 percent, while 60 percent of tappable home equity is held homeowners with rates south of 4 percent. Those numbers are indicative of a growing market for home equity lending.
An emerging market
With the prime rate hovering around 5 percent as the year nears a close — and the Federal Reserve expected to remain in a rate-raising mode for the foreseeable future — we can expect homeowners to remain reluctant to pursue cash-out refinancing. How many people, after all, are willing to swap out a lower rate on their existing mortgage for a higher one and pay high closing costs as well?
The demand for access to mounting home equity is there, however. The average 30-year fixed-rate mortgage interest rate broke the 4.7 percent threshold as of this past September, a mark not reached since April 2011, according to Freddie Mac. Still, TransUnion estimates that, despite a less rate-friendly environment, some 1.6 million homeowners will seek second mortgages (HELOCs) in 2018, and an additional 10 million from 2019 to 2022.
That’s a sizable pool of home equity loan business, and more lenders and mortgage originators are beginning to recognize that they will need to strap home equity loan products back on their tool belts to better serve their customers. What will you do take your fair share of that market? How will you advise and influence prospects to secure their second-mortgage financing from you?
“Who Dares Wins” is the motto of the elite British Special Air Service. While no one is commanding you to join the military, it’s highly recommended that you line up your home equity loan resources now, so you can get out in front of the move toward home equity lending, attract more customers and close more loans. You must dare to win to get a slice of this market.
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To improve your odds for success in the home equity loan market, consider working with nonbank lenders specializing in second-mortgage products. Driven by speed and convenience, these lenders could become valuable partners in unlocking the power of home equity for your borrowers, helping to grow your business in the process.