HELOC volume up almost 50% in the first 5 months of 2022

Home equity lending is on a roll this year, with the combined volume of home equity lines of credit (HELOC) and traditional closed-end home equity loans up 47% from January to May 2022, compared to the same period last year.

Nearly $69 billion in HELOC credit limits and $27 billion in closed-end home loans were issued in the first five months of 2021. This compares to $101 billion in HELOC volume and $38 billion in dollars of closed-end mortgages over the same period. period this year, according to a new report from the Urban Institute Housing Finance Policy Center.

Closed home loans typically carry a fixed interest rate and involve a single lump sum disbursement at the start of the loan, with repayment beginning immediately. HELOCs, on the other hand, are revolving debt with variable interest rates, like credit cards, and do not normally involve a single lump sum payment. Instead, HELOCs offer two separate periods over the term of the loan – a 10-year drawdown period and a 15-year repayment period, for example.

“With the economics of cash refinancing worsening in a higher rate environment, homeowners are showing an increased willingness to use home equity lines of credit (HELOCs) and home equity loans. their property to leverage their capital,” the recent Housing Finance Policy Center report said.

The growing popularity of home equity loans should also help rekindle interest in HELOC aggregation for residential mortgage-backed securities (RMBS) offerings, which have been almost non-existent since the 2008 global financial crisis, according to a recent report focused on HELOC by bond rating company DBRSThe morning star.

“A few HELOC securitizations have been issued recently, having been non-existent in the post-financial crisis era…,” the DBRS Morningstar report said. “More potential issuers have been looking to add HELOC securitization funding this year, especially given the dramatic increase in home values, which is increasing the availability of home equity.

“As HELOC origins grow with both bank and non-bank financial lenders, RMBS HELOCs may see additional opportunities for issuers, and structure formats will likely adapt to the unique characteristics and risk aspects of HELOC products today.”

The DBRS Morningstar report also points out that non-banks have begun offering HELOCs that feature “slight variations from the traditional deposit HELOC form,” such as shorter terms, fixed rates, and a lump-sum payment option. the draw period. Among the non-banks that have or plan to introduce HELOC loan products are Rocket Mortgage, Guaranteed rate, loanDeposit and New residential investment company. (recently renamed Rhythm Capital).

The DBRS Morningstar report also notes that from 2019 to date, a total of only nine residential mortgage-backed securities (RMBS) offerings have been completed involving HELOCs as collateral.

One such offering made its way to market this year. This deal, dubbed GRADE 2022-SEQ2, was a $198.6 million RMBS offering sponsored by Saluda Grade Opportunities Fund LLC. It was backed by 2,327 loans that included a mix of closed second mortgages and HELOCs, according to a pre-sale report from Kroll bond rating agency (KBRA) .

The loan originator for the RMBS offering was Spring EQ LLC, which focuses on second mortgages, including closed-end home loans and HELOCs. The original purchaser of the notes for the RMBS offering, which closed in April this year, was Raymond James & Associatesaccording to the KBRA report.

The surge in home equity loans was also denounced by the Federal Reserve Bank of New York, which noted in its report on household debt and credit for the second quarter of 2022 that limits on HELOCs had jumped by $18 billion in the second quarter of this year. The jump represents “the first substantial increase in HELOC limits since 2011” and is an indicator of an increase in new creations. HELOC balances were $319 billion for the second quarter, according to the Federal Reserve report.

Home Equity Line of Credit (HELOC) balances increased by $2 billion [in Q2]a modest increase but one that follows many years of declining balances,” the Fed report continued.

Another report from Trans Union shows that the number of HELOC origins nationwide, based on credit bureau analysis, increased from 207,422 for the second quarter of 2021 to 291,736 for the second quarter of this year, an increase by 41%.

Additionally, one of the country’s largest lenders, Bank of Americaalso reported a sharp increase in the total number of home equity loans in the first six months of 2022 – from about $1.7 billion in 2021 to $4.6 billion this year on a principal amount basis. of the total line of credit, according to the second-quarter 2022 earnings report. HELOCs were not broken down separately in this report.

“Cash-out refinance volumes will likely remain low for the foreseeable future as most borrowers will be reluctant to waive their ultra-low rates,” the Housing Finance Policy Center report said. “This suggests that demand for HELOCs and home equity loans will remain strong, particularly given the shortage of supply and the substantial build-up of equity for existing homeowners.

“We also expect the availability of home equity credit to improve as mortgage lenders look for ways to approve more borrowers to maintain volumes.”

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