CoreLogic: Home Equity Lending in Comeback Mode

After years of dampened activity, home equity lending is making a comeback, said CoreLogic, Irvine, Calif.

In a new white paper, Home Equity Lending Landscape, CoreLogic noted for the past two years, origination volumes have been trending up sharply higher as more homeowners benefit from home price appreciation and more lenders regain confidence in home equity lending.

CoreLogic reported during the first three quarters of 2015, lenders originated nearly 1 million new home lines of credit with combined limits in excess of $115.8 billion, the highest figures since 2008, representing year over year gains of 21 percent and 31 percent, respectively.

Despite the uptick, CoreLogic said the HELOC market remains below its 2005 peak, when originations totaled nearly $364 billion. “But there are clear signs that a continually improving real estate market, a strengthening economy and better loan performance are converging to increase the lending community’s comfort level with home equity products,” the paper said.

CoreLogic said lines of credit being originated today are being underwritten more conservatively than in previous years. A CoreLogic analysis of HELOCs originated in 2015 showed the average combined loan-to-value ratio was just under 61 percent; the average credit score at origination was a “relatively pristine” 774.

CoreLogic also noted that performance of recently originated home equity is “exceptionally good;” since 2009, the average 60-plus day delinquency rate at 36 months after origination was 25 basis points, half the rate of the early 2000s.

“All of which suggests that the industry has learned its lesson from the mortgage crisis and is adapting to the new more regulatory-focused environment,” the paper said. “What hasn’t changed, however, are the challenges of finding profitable customers and originating no-cost products in a manner that improves, rather than impedes, relationship building,” the paper said.

The paper noted house price appreciation and job growth have driven home equity demand. Strong home price appreciation in most market has significantly reduced negative equity at the bottom of the market and created more than $6 trillion in equity since the market trough in 2009. At the end of the third quarter, more than 15.6 million borrowers had loan-to-value ratios of less than 50 percent and another 18.3 million had LTVs between 50 and 75 percent. Additionally, nearly 30 million homeowners own their homes free and clear. Additionally, more than 13.5 million new jobs have been created since 2009, reducing the unemployment rate to just under 5 percent.

“Lenders that are rethinking their approach to home equity might want to familiarize themselves with the enhanced underwriting, valuation and portfolio and market analysis tools that are now available,” the paper said.

Expenditures for home improvements should see healthy gains in 2016, the Joint Center for Housing Studies of Harvard University said last month.

The Center’s Leading Indicator of Remodeling Activity projects annual spending growth for home improvements should accelerate from 4.3 percent in the first quarter ($140.9 billion) to 7.6 percent in the third quarter ($154.8 billion).