Equity Lending Faces Mixed Future

A new study by the Mortgage Bankers Association (MBA) looks at lending and servicing of home equity lines of credit (HELOCs) and closed-end home equity loans (HE Loans.)  The study finds that lenders see the current demand for equity lending to be mixed between loan types and doesn't anticipate a lot of improvement in HELOC lending in the mid-term.

Both home equity loan debt and borrower utilization rates declined last year.  Marina Walsh, MBA's Vice President of Industry Analysis says, "Many households are not tapping the equity in their homes, despite the significant rise in home equity since the Great Recession, wage growth, and low unemployment.  Our study found that lenders do not anticipate a significant ramp-up in activity through 2020 because of various challenges, including other viable consumer financing alternatives, pricing pressures and competition, and rising costs. Furthermore, changing borrower sentiment and confusion over tax deductibility appear to have contributed to lackluster lending activity in recent years, as well as muted expectations going forward."

Walsh said lenders expect HELOC originations to fall off by 3.8 percent this year but then grow by 3.4 percent in 2020. HELOC debt outstanding is expected to decline by 2.9 percent this year and 2.1 percent in 2020.  

The Home Equity Lending Report, which covers data through December 31, 2018) also found that the HELOC debt outstanding was down by 2 percent from the beginning of last year to the end as borrower utilization rates declined. 

The utilization rate, which is the dollars of debt outstanding compared to the amount of credit available, declined steadily over 2016 through 2018 loan vintages.  For example, average utilization nine months after origination was 46 percent for 2016, 45 percent for 2017, and 43 percent for 2018.  The 2018 utilization rate for all active HELOC accounts regardless of origination year was 46 percent in 2018.  Twenty-seven percent of accounts had no outstanding balance at year's end.

HE Loan debt outstanding was down by 5 percent from the beginning to the end of 2018.  As the average age of the portfolio increased - 76 percent of accounts were over three years old in 2018 - newer, higher-balance originations were not fully replenishing payoffs and amortization.

Still, the outlook for HE Loans is brighter than for HELOCs. Originations are expected to increase by 7.8 percent in 2019 and 8.4 percent in 2020 and the debt outstanding is expected to increase 2.0 percent in 2019 and remain flat in 2020.

MBA's study on Home Equity Lending for open-ended HELOCs and closed-end home equity loans was conducted in the Spring of 2019. MBA collected data from 27 member companies - including large banks, community banks, and independent mortgage companies - representing $64.7 billion in originations volume for 2018, $517.4 billion in maximum credit extended to borrowers as of December 31, 2018, and $249.7 billion in outstanding borrowings as of December 31, 2018.