Banks continue to report shrinking balances of home equity lines of credit, or HELOCs, despite increases in originations over the last several years, a trend that could be in flux as rates rise.
Mortgage rates have spiked since President-elect Donald Trump's victory, and some economists think the trend could accelerate the decline of bank portfolios of HELOCs.
"Borrowers with existing HELOC balances, when they see the move in rates, they'd pay off their balances more quickly," said Michael Fratantoni, chief economist for the Mortgage Bankers Association.
Across the banking industry, HELOC holdings totaled $444.31 billion in the third quarter, down 5.8% year over year. That largely reflects the long tail of the foreclosure crisis that triggered the 2008 credit crisis. Bank holdings have shrunk throughout 2016 even though HELOC originations were higher on a year-over-year basis for the first half of the year.
"The outstanding balance is still shrinking because there are legacy loans originated in 2006 and 2007 and a lot of those are going through foreclosure," said Frank Nothaft, chief economist for CoreLogic.
The figures for Bank of America Corp. support that theory. The bank, which got saddled with troubled mortgages from its Countrywide acquisition during the financial crisis, reported the largest sequential decrease in HELOCs in the third quarter, shedding $2.88 billion of the product.
At the same time, rising rates could make HELOCs more attractive than cash-out refinancing. While higher rates could encourage borrowers with outstanding HELOC balances to pay down their holdings, a rising-rate environment could encourage some borrowers to pursue a HELOC instead of a refinance. During a recent analyst day for LendingTree Inc., leading mortgage executives said they expect to see increasing use of HELOCs over the next year. Fratantoni said a borrower with a sub-4% rate on a first mortgage might be unwilling to pursue a cash-out refinancing for a renovation project.
"I think they're going to be unlikely to lose that low rate on their first mortgage, so they might go to closed-end second or HELOC or even a credit card to fund that," he said.
Mortgage rates at banks jumped 38 basis points in the month following the presidential election, and broader rate surveys show even greater increases. For example, Freddie Mac reported 30-year mortgage rates were 4.16% on average as of Dec. 15, a 59-basis-point increase since Nov. 10.
Improved home prices mean homeowners have more equity to tap for renovation projects, vacations or other splurges. CoreLogic reported on Dec. 8 that U.S. homeowners with mortgages, in aggregate, enjoyed a $227 billion increase in home equity in the third quarter alone. Compared to the year-ago quarter, homeowners have an additional $726 billion in equity.
The run-up in home prices over the past few years has been accompanied by an increase in HELOC originations. ATTOM Data Solutions, parent company of RealtyTrac, reported that HELOC originations had increased year over year for 17 straight quarters between the second quarter of 2012 and the second quarter of 2016. In the third quarter of 2016, HELOC originations took a step back, dipping 6% year over year.
Daren Blomquist, senior vice president for ATTOM Data Solutions, said in a news release that the third-quarter drop in HELOCs could be related to election uncertainty, as home purchases also dipped in the third quarter.
CoreLogic's Nothaft thinks HELOC originations will rebound and start growing again over the next year.
"The primary driver of HELOC originations has been house price growth, and we're anticipating 4% growth in 2017," he said. "That's another $1 trillion in home equity growth."
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