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CoreLogic Econ


As Equity Rises, So Do Prospects for New Home Equity Lending

Part 1

Sam Khater    |    Mortgage Performance

Home equity lending, for years the red-headed step child of our industry, is coming back into favor thanks to the growth in equity that millions of American homeowners are experiencing, and the improving economy.

2015 data from CoreLogic show that home equity lending has been increasing steadily in the past couple of years, with HELOC originations doubling from about a $50 billion 12-month cumulative amount right after the recession, to more than $100 billion in the first half of this year. But keep in mind, overall all volumes are still signficantly lower than the peak years of 2002-through-2006 when home equity originations were running at $400 billion- plus per year.

But even though the volumes aren’t there—the equity is. The number of homeowners with loan to value (LTV) ratios below 50 per cent and between 50 percent and 75 percent has grown steadily in the past two years. A recent analysis by CoreLogic showed that the number of mortgages with equity between 50 percent and 75 percent has grown from about 11 million in the third quarter of 2009 to nearly 18 million in the second quarter of this year, with the biggest jump occuring since 2013.

Similarly, loans with 50 percent LTV or lower grew from 11.3 million to 15.4 million in the same period.

Many observers believe that these borrowers will represent the sweet spot for home equity lines of credit and closed end seconds—if not now, in the future, when they must finance life’s extraordinary events, like a a new kitchen, a hefty tution, a medical bill or a daughter’s wedding. 

Another 30 percent of all US homes are owned free and clear, and are conceivably also candidates for HELs or HELOCs.  But at the higher end of this 40-million home pool, the wealthiest owners probably don’t need to tap equity, even to pay large bills. Meanwhile the lower end of the zero-percent-LTV category may have other issues, such as credit and income, which might make them less attractive candidates. So the sweet spot is people with a mortgage who have seen the equity in their homes rebound in recent years.

Some lenders may be a little gun shy about home equity considering the absolute crater it created during the mortgage crisis. But it’s worthwhile remembering that much of the problem was caused by simultaneous seconds and B-paper equity lending. The current market is just about all A-paper-people (as we’ll examine in an upcoming blog on underwriting).

Also, predictions that the sky would fall once legacy loans of the 2005-2007 era reset haven’t materialized—at least on a large scale.  Proactive HELOC refi and extension programs and the huge wave of first mortgage refinances seem to be preventing, or at least forestalling, a new round of defaults.

On the other side of the home equity coin, underwater mortgages continue to decline. At the end of the first quarter of 2015, there were 5.1 million mortgages with negative equity, down sharply from 5.4 million the quarter before. In dollars, aggregate negative equity fell by nearly $12 billion between the fourth quarter of last year and the first quarter of this year. Year over year, underwater mortgages have dropped nearly 20 percent. These are not home equity candidates now, but they may be a few years down the road if jobs continue to increase and their equity starts to build up.

How solid of a trend is this? According to our numbers, HELOC originations have risen in each of the last 18 quarters.

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