Home-equity lending blossomed in 2023

Home-equity lending overall found its wings in 2023 as a number of independent mortgage banks ramped up product lines over the course of the year — despite a bump in the road in the third quarter when mortgage rates surged past 7%.

The popularity of home equity lines of credit (HELOCs) and closed-end second (CES) mortgages last year was reflected in the secondary market as well, where the volume of securitizations rose sevenfold from 2022 levels. That increased capacity in the private-label securities market is key to continuing the momentum of home-equity lending into 2024, industry experts say.

What remains an unknown, however, is whether housing inventory, pricing and interest rates will settle into a goldilocks zone that allows home equity lending to flourish. Market indicators so far appear tentatively promising.

Real estate data firm ATTOM reports that overall HELOC loan originations by count were actually down by 7% in the third quarter of 2023 as interest rates spiked. According to Freddie Mac, rates for 30-year fixed mortgages rose during the quarter to the mid-7% range — and stayed in that range until mid-December, when they finally fell below 7%.

Variable-rate HELOCs and fixed-rate CES mortgages typically carry rates that start a couple points above the prevailing 30-year fixed rate.

“An estimated $54 billion in equity withdrawals were forgone in Q3 [2023] as rising interest rates increased the cost of equity utilization,” said ICE Mortgage Technology Vice President of Enterprise Research Andy Walden in the company’s December 2023 Mortgage Monitor report.

Even though HELOC originations were down due to the towering rate environment during the third quarter of last year (the most recent data available), the Federal Reserve reports that balances on outstanding HELOC loans increased during the period by $9 billion, to $349 billion. In addition, Fed data shows that total outstanding loans linked to home-equity products also increased in the third quarter — to $501 billion, up 2.3% from $490 billion in the second quarter. 

A recent report from real estate analytics firm CoreLogic indicates that for U.S. homeowners with outstanding mortgages — some 63% of all homes — home equity tied up in properties jumped by 6.8% year over year as of the third quarter of last year. That represents an aggregate gain of $1.1 trillion, or an average of increase of more than $20,000 for each borrower since the third quarter of 2022. 

As of the end of September last year, home equity for mortgaged properties in the nation totaled nearly $17 trillion, CoreLogic reports, representing a deep reservoir of potential future business for lenders nationwide. 

“HELOCs were the major story in the later part of 2022 and persisted throughout 2023,” said John Toohig, head of whole-loan trading on the Raymond James whole-loan desk and president of Raymond James Mortgage Co. “We’ve seen a resurgence of a product that was largely dormant for a decade.

“HELOCs have easily been the product with the largest increase in [loan]-trading volumes.”

Variables ahead

The path ahead for home equity loans — with HELOCs and CES mortgages representing the bulk of the market — is expected to be closely tied to the pace of interest rate declines as the Federal Reserve is expected to begin ratcheting its benchmark rate downward over the next year. If rates drop far enough, demand for home equity loans could subside, particularly HELOCs, as more homeowners opt for cash-out refinancing, according to Toohig.

Selma Hepp, chief economist for CoreLogic, said, with respect to HELOCs, that homeowners “aren’t going to sell their homes because there’s this lock-in effect now” with so many mortgages outstanding carrying a 3% to 4% rate.

“So, until mortgage rates get down to the 5% range … they really have to drop a lot to change that [lock-in effect] dynamic,” she added. “Because of a lack of [housing] inventory, people are deciding to add more to their [existing] home or spend on their home because there’s nothing else out there to replace that home with a better home.”

“Between late October and mid-December, the 30-year fixed-rate mortgage plummeted more than a percentage point [but] since then rates have moved sideways as the market digests incoming economic data,” Sam Khater, Freddie Mac’s chief economist, said in a recent media statement. “Given the expectation of rate cuts this year from the Federal Reserve, as well as receding inflationary pressures, we expect mortgage rates will continue to drift downward as the year unfolds. 

“While lower mortgage rates are welcome news, potential homebuyers are still dealing with the dual challenges of low inventory and high home prices that continue to rise.”

Mortgage Bankers Association (MBA) Senior Vice President and Chief Economist Mike Fratantoni, in a recent forecast report, said mortgage rates are expected to end 2024 “closer to 6% … compared to mortgage rates that are just below 7% as of this writing.”

“We’re really looking at rates [in 2024] staying above 6.5% for most of the year, with an outside possibility of getting a 6.25% rate, maybe a bit lower, closer to 6% by the end of the year,” Todd Teta, chief product and technology officer at ATTOM, said in an end-of-year market-outlook webinar.

Ben Hunsaker, portfolio manager focused on securitized credit for Beach Point Capital Management, said in case “where the fed cuts 250 basis points [2.5 percentage points], I’m not sure that’s necessarily a scenario where housing volumes are great and housing prices are strong because that would conceptually be probably pretty correlated with a really weak consumer or some recessionary-type outcome.”

“And then you have to have wider spreads which means the value of creating those mortgages and securitizing them is again hampered,” he added.

Housing inventory, as Hepp points out, also is a major variable with respect to home-equity lending, with a lack of inventory a factor in helping to spur demand for HELOCs and CES.

“The rule of thumb is that available inventory rises when mortgage rates rise, and inventory falls when mortgage rates fall,” ATTOM’s Teta said. “People sometimes ask me, ‘If rates fall, won’t that mean there’s a lot more sellers that can sell because they want to move?’

“And the answer is it will create more supply, but it actually spurs demand more than supply.” 

The goldilocks effect

Whether those rate and related housing inventory forecasts pan out to create a goldilocks moment for HELOCs and other home-equity products in the year ahead, time will tell. But the infrastructure in the secondary market to create liquidity for the product via securitizations is already in place and being fed by nonbank and bank lending alike.

“We estimate that an additional $4 billion of PLS [private-label securitization of] HELOC and CES [loans] entered the residential mortgage-backed securities market in 2023 [across some 16 offerings] — a meaningful increase from 2022 … representing an almost 7x increase,” states a recent sector outlook report by the Kroll Bond Rating Agency (KBRA). “For 2024, we project $6 billion in PLS HELOC and CES.”  

By comparison, KBRA data shows that in 2022 there were only three HELOC/CES-backed securitization offerings valued in total at about $626 million.

In fact, in the final days of 2023, J.P. Morgan sponsored a $258 million private-label securitization involving some 3,000 HELOC loans, with United Wholesale Mortgage (UWM) and loanDepot originating the lion’s share of the HELOCs backing the offering. It was the third such offering sponsored by J.P. Morgan in 2023, with those three securitizations backed by HELOCs with a combined value at issuance of $725.6 million.

“UWM and loanDepot’s production of HELOC loans began fairly recently, with the originators launching these products in 1Q 2023 and 3Q 2022, respectively,” a KBRA bond report on the offering states. “This comes at a critical time for American households grappling with the combined effects of elevated interest rates, inflation and steep living expenses. 

“Meanwhile, rising property values over the past two years have provided homeowners with substantial equity in their homes.”

Depository institutions, primarily banks, continue to dominate the home equity space, given they have the ability to hold loans in portfolio — with Bank of America, Citizens Bank and PNC Bank leading the pack last year, according to a recent report by Inside Mortgage Finance (IMF). Nonbanks, however, are starting to light up score board as well, with Spring EQ and Figure Lending ranking among the top 10 lenders in the sector, according to IMF, and Rocket Mortgage making a showing at No. 16 in the most recent rankings.

Hunsaker said major nonbank originators have now planted their flags in the home equity market. They include lenders like UWM, loanDepot and Rocket Mortgage. Rocket, like J.P. Morgan, also sponsored three securitizations in 2023 backed by home equity loans (CES mortgages) valued in total at $922.3 million at issuance.

“And then you had the secondary capital markets step up because it didn’t do them [lenders] any good to be able to originate a ton of volume if they didn’t have a place to go with it,” Hunsaker said. “Lenders like J.P. Morgan have done a great job of developing those channels for securitizations.

Hunsaker stressed that there’s trillions of dollars in household balance-sheet wealth “that’s sitting in properties that people aren’t willing to sell, and they’ve got a lot of financial and household balance-sheet incentives not to sell.”

“So, I think [home-equity loans are] a good personal finance solution for a lot of Americans and the originators themselves,” he added. “… I think it solves a lot of people’s problems, but it does create more leverage in the financial ecosystem in the event of house price drawdowns — which we don’t really have right now.”