Sponsored Content from WFG: Rising Rates and Record Appreciation Drive Shift to Home Equity Lending
At the end of 2021, as U.S. vaccinations were drastically reducing the severity of the pandemic, an uptick in mortgage interest rates was drastically reducing the previous two years’ record home refinancing volume. This came after a run in property appreciation that saw American mortgaged homeowners enter 2022 with unprecedented growth in their homes’ equity.
According to data provider Attom, by the second quarter of 2021 more than a third of mortgaged U.S. residential properties were considered “equity-rich.” That meant the estimated market value of those homes was double – or higher – than the secured loan amount.
In 2021, the second year of COVID-19, average values of the nation’s residential properties rose 18.8 percent, according to the S&P CoreLogic Case-Shiller US National Home Price index. It marks the biggest increase in 34 years, “substantially ahead of 2020’s 10.4 percent gain.”
According to a CoreLogic report, that equated to home equity gains in 2021 of $3.2 trillion, and a national negative equity share of 2.1 percent in the fourth quarter of 2021 – “the lowest in more than 12 years.”
While the gains in home values were not uniform across all regions, they were all significant. The Northeast realized home appreciation under 10 percent, while their counterparts in the southern states gained 20 percent or more. Similarly, demand within a region can affect the appreciation rate, with high-end homes in some areas appreciating faster, while in other areas entry-level homes received the biggest lift.
Concerns that we were in for an onslaught of foreclosures due to pandemic-prompted job loss now seem overblown. As Patrick F. Stone, the Founder and Executive Chairman of WFG National Title Insurance Company, made clear in WFG’s Quarterly Economic and Title Industry Forecast on February 23, “There’s not going to be a lot of foreclosures.”
“About two-thirds of all mortgage lending in the last couple of years has been to people with FICO scores over 760,” Stone explained. “The reality is price appreciation has been such that, even if [borrowers] can’t afford to make their payments, they can sell their home and cover their costs. There were about 3.5 million foreclosures after the Great Recession, but this time it’s going to be less than one-tenth of that.”
Rate Hikes Rise, Mortgage Apps Drop
After staying unthreatening during the years of sharp home value gains and steady, bargain-basement mortgage rates, inflation is now center stage. In response, the Federal Reserve notched up its key interest rate by a quarter percentage point on March 16. It marked the first increase since 2018 and came two years to the month after the Fed dropped that rate to near zero and the U.S. marked the onset of COVID-19.
That day, according to The New York Times, in defending the anti-inflationary measures, Fed Chair Jerome H. Powell said, “The economy no longer needs – or wants – this very highly accommodative stance.”
To reign in what is already a 40-year high for the inflation rate, the Fed projects as many as six more incremental upward rate adjustments this year.
On the same day the Fed made its announcement, the Mortgage Bankers Association released its Weekly Applications Survey, showing seasonally adjusted drops of 1.2 percent for new purchase applications and a single-week drop of three percent in the refinance index for the week ending March 11. That represented a year-over-year decline of just under 50 percent for refis.
Commenting on the findings, Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting, said, “The 30-year fixed-rate mortgage increased last week to 4.27 percent – the highest since May 2019. Rates are now roughly a full percentage point higher than a year ago and continue to hamper refinance activity. Refinances declined for both conventional and government loans.”
Refis Out, Home Equity Lending In
With the road to refinancing now freighted with higher tolls, homeowners will be shifting to home equity lending. That comfortable equity cushion, averaging $178,000 per homeowner nationally, is quickly available to borrow against for renovations, paying down higher-interest debt or meeting other needs, including a long-postponed vacation.
Lenders need to prepare to help these potential customers with the two major borrowing options – home equity loans and home equity lines of credit, or HELOCs. Both products offer homeowners the lower rates and flexibility to tap into these unprecedented levels of liquidity without impacting their current mortgage interest rate.
While they both draw on the equity in a property as collateral, a home equity loan involves borrowing a fixed, lump-sum amount and a HELOC establishes a credit limit based on the home’s available equity, generally up to 85 percent of its value minus outstanding mortgage balances. With its revolving form of credit, it functions much like a credit card for the set length of an established draw period, usually 10 years. Checks or a “draw card” are issued and minimum monthly payments are required, with an initial period in which payments may be “interest-only.”
Lender Services for the Home Equity Lender
WFG Enterprise Solutions, a division of Williston Financial Group, has a range of products and services in place to help home equity lenders serve their homeowner clients across the country.
Since home equity loan origination costs are often paid for by the lender, WFG makes sure that the lender knows costs upfront and guarantees those fees and a timetable for delivering required products and services in a timely manner.
WFG offers a variety of products and services for home equity loans, including traditional title insurance, junior loan policies, and master equity line loan policies with coverage up to $1 million. WFG also offers warranted informational products, such as legal and vesting reports and property reports for lenders looking for a cost-effective alternative to title insurance.
Supplementing these offerings are valuation services that can be coordinated for home equity lending purposes. Offered through WFG’s Appraisal Management Company, Valutrust Solutions®, a Williston Financial Group company, these home equity lending valuations include automated valuation services; desk reviews; and field valuation services, such as property condition reports and the recently introduced ValuTrueTM, a property evaluation report that gives lenders a complete suite of valuation services.
Valutrust Solutions’ services are available through the web-based Valutrust platform, which can be integrated with any loan origination system and industry partner. The Valutrust platform allows customized, single-source ordering and lender-controlled, rule-based product selection. The platform dashboard allows monitoring of the progress by the client throughout the transaction. Lenders can also order WFG Lender Services’ title and closing services through the Valutrust platform.
As homeowners who seek to access funds shift from home refinancing to home equity borrowing, lenders will need to be ready to help with the knowledge and tools they need to service these consumers efficiently and with minimal added costs.
Finding a reliable vendor with which to partner will be valuable, and WFG has the technology and expertise to help.
(Sponsored content includes material submitted independently of the Mortgage Bankers Association and MBA NewsLink and does not connote an MBA endorsement of a specific company, product or service. For more information about sponsored content opportunities, contact Bill Farmakis at firstname.lastname@example.org or 203/834-8832.)