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Home equity loans, HELOCs seen as possible cash-out refi substitute


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Home equity loans, HELOCs seen as possible cash-out refi substitute

With rising interest rates triggering expectations for a sharp reduction in mortgage refinancing activity in 2017, some market participants expect consumers to increasingly turn to home equity loans and lines of credit as a way to gain access to additional funds.

The Mortgage Bankers Association projected in a forecast published Nov. 16 that the aggregate refinancing of one- to four-family mortgage loans would plunge to $484 billion in 2017 from what would represent a three-year high of $901 billion in 2016. Refinancing volume bottomed out in 2014 at $502 billion, which represents the lowest level of activity of that kind in a calendar year since 2000, according to Mortgage Bankers Association data.

During a roundtable discussion convened Dec. 13 by online loan marketplace LendingTree Inc. during its analyst day, industry executives offered a range of perspectives on the outlook for mortgage refinancing activity and changes in consumer behavior that may result from higher rates.

James Plum, executive vice president of lending at Huntington National Bank, said he is "bullish" on the mortgage and home equity businesses for the coming year.

"The rising rate environment is going to fundamentally change the number of clients that are coming through," Plum said during the LendingTree panel discussion. "We don't think refis are going to go away. We think there are a lot of customers with [adjustable-rate mortgages] ... that want to refinance. But the rising rate environment is going to make home equity much more important in 2017 than it has been for a couple of years. ... We think the home equity line of credit market is going to expand. We think the home equity installment market is going to expand."

Plum said he suspects consumers will be reluctant to engage in cash-out refis on first mortgages with historically low rates but will turn to home equity products because "they're still going to want to redo their kitchen." While he declined to predict the amounts by which home equity loan and HELOC production will rise, Plum said he thinks "more banks will become a little bit more committed to this space as mortgage refis tail off."

Huntington reported $4.28 billion of mortgage originations through the first nine months of 2016, up from $3.69 billion in the year-earlier period. It ended the third quarter holding $7.67 billion in residential mortgages and $10.12 billion in home equity loans, including $1.07 billion in mortgages and $1.49 billion in home equity loans added through its August acquisition of FirstMerit Corp.

Home equity may become a bigger part of LendingTree's business as well. Chief Marketing Officer Sam Yount said during the analyst day that he sees a "huge opportunity" for the product to grow. CFO Gabriel Dalporto observed that "for the first time in a long time, there's a lot of equity in people's homes," and he said there has been "a pretty significant uptick in industry approvals and originations."

Yount said the cash-out refi product had been "a gold mine" for LendingTree as mortgage rates fell, but he expects consumer demand to begin to shift back toward home equity loans as rates rise.

"We're also starting to see on the lender side significant demand from lenders, mostly at this point from bank lenders, but over time, as a secondary market starts to develop, we wouldn't be surprised to see correspondent and online lenders enter as well in a significant way," Dalporto said.

LendingTree generated annual revenue of about $50 million from the home equity business at that market's peak in 2005, and Dalporto does not think "there's any reason it wouldn't and shouldn't be a $50 million business for us again and maybe even more."

Dalporto presented Experian data that projects 14% growth in home equity originations in 2017 relative to the 7% estimated rate of expansion for 2016. CoreLogic Inc. recently predicted in its U.S. economic outlook that HELOC originations would help partially offset a decline in refinancing in 2017.

On the other hand, Graham Skidmore, vice president of marketing and business channel strategy at Quicken Loans Inc., said he observed homeowners during his career show a willingness to pay higher interest rates to accomplish their overall financial goals.

"We have already seen cash-out refinances go from a minimal part of our business to a significant amount of our business of refinance," he said during the LendingTree panel. "Refinances have always been a majority of our business over the course of 30 years, and interest rates have not fallen for 30 years. So we ... are not expecting the drop-off that I think probably the industry or others forecast, but I think that's probably unique to our outlook."