Mortgage Lenders Launch HELOCs as Home Equity Plummets By $1.3 Trillion

Despite massive drops in collective home equity, mortgage lenders continue to roll out new home equity line offerings.

Yesterday, Black Knight reported that homeowners lost a whopping $1.3 trillion in home equity in the third quarter alone.

The company said it was “by far” the biggest quarterly drop on record by dollar value and the largest decline since 2009 on a percentage basis.

Of course, total homeowner equity peaked as recently as May and is still north of $5 trillion, which means mortgage lenders will be eager to offer related products.

And though total home equity among mortgaged properties is now down roughly $1.5 trillion since its peak, it’s still up 46% from pre-pandemic levels.

Home Equity Down as Home Prices Pull Back

While it seems a bit counterintuitive to launch home equity products in a declining home price environment, one needs to put it in perspective.

The same is true of so-called “falling home prices,” as even relatively large declines lately are mostly a drop in the bucket relative to recent gains.

Yes, home prices fell 0.52% in September, per Black Knight, a third straight monthly decline.

But annualized appreciation was still up 10.7% from a year ago, more than double the long-term norms.

You see, home prices went up so much over the past few years, that even a double-digit decline means most homeowners still sit on a ton of equity.

As I wrote back in September, the national loan-to-value ratio (LTV) was a super low 29.5% as of the second quarter.

While recent pullbacks in home prices will undoubtedly raise LTVs, it still illustrates just how much equity the average American holds.

This contrasts the housing bubble days of 2006-2008, when your typical homeowner took out a zero down mortgage and a pay option ARM.

Today, it’s a 30-year fixed set at 2-4% with anywhere from 20-50% in available equity. Quite a different mortgage market.

But it’s those same low, fixed interest rates on first mortgages that are driving the push to launch home equity loans and lines of credit (HELOCs).

Movement Mortgage and Homepoint Launch HELOCs

It doesn’t make sense for most homeowners to refinance these days, even to tap their equity.

The long and the short of it is they’ll lose their super low fixed rate on their first mortgage, which would be a huge loss.

There are few reasons a homeowner would exchange a 3% rate for a 7% rate.

This is why second mortgages have grown in popularity, as they allow homeowners to tap equity without disrupting the first mortgage.

The latest companies to announce home equity offerings are wholesale lender Homepoint (for mortgage brokers) and Movement Mortgage, in partnership with Figure.

Homepoint’s HELOC is currently 38 states and Washington, D.C., via its network of mortgage broker partners.

Borrowers can access between $20,000 to $400,000 of their home’s equity as a line of credit with a 5-, 10-, 15- or 30-year term.

There is a 2-5-year draw period, meaning homeowners can borrow more the first few years before paying it back.

They must maintain at least 15% equity in their home, which tells us the max CLTV is 85%.

It’s available on one-unit owner-occupied properties, along with one-unit second homes and investment properties.

Meanwhile, Movement Mortgage, which describes itself as the nation’s 6th largest retail lender, has partnered with Figure to launch its own HELOC.

Similar to loanDepot’s digital HELOC, it’s a paperless process that allows approval in as little as five minutes and funding in as few as five days.

The transaction will be recorded and stored on Figure’s Provenance Blockchain, which they call the “leading public blockchain in financial services.”

While HELOCs are expected to explode in popularity, HELOC rates remain high due to increases in the fed funds rate and corresponding prime rate.

But by next year interest rates on such products may begin to fall as inflation slows.

By the way, only 3.6% of the nearly 53 million mortgage holders in the U.S. are either underwater or have less than 10% equity in their homes, about half the share prior to the pandemic.