Home Equity Isn’t a Bridge to the Next Refinance Wave. It’s Time to Treat it That Way.

Andria Lightfoot is vice president of client success at FirstClose, Austin, Texas.

First-lien mortgage origination has always been a rate-driven business, which is why the industry keeps describing today’s market as expensive. But, by historical standards, it isn’t. The 30-year fixed rate has spent the past year within 40 basis points of what it averaged annually across the 2000s.

What separates this cycle from past ones is the distance between the rate borrowers already hold and the rate on offer. Borrowers are not giving up a sub-3% interest rate for one that’s more than double that. Because independent mortgage banks (IMBs) originate the vast majority of purchase and refinance loans, they feel the pain of today’s first-lien market most acutely. To fill the gaps in their pipelines, many have entered the home equity space, which has traditionally been the purview of banks and credit unions.

The same market dynamics driving IMBs toward home equity are also what’s cementing the product’s status as a longer-term play rather than a bridge to the next refinance wave. Thus, IMBs need to ensure the underpinnings of their home equity operations are built to sustain that product for the long haul.

The problem isn’t the rate

The current interest rate environment isn’t as much of an outlier as it seems. Across 2000 through 2009, the 30-year fixed rate averaged 6.29%, and rates over the past year have run between 5.97% and 6.69%. What’s changed is the size of the moves. According to Freddie Mac’s data, the 30-year average annual rate rose 58 bps between 2003 and 2006 and 88 bps between 2012 and 2018. Since 2021, it has risen 364 bps, from an average of 2.96% to 6.60% last year.

The first two rate increases impacted volumes in the same way. Refinance volume fell by 48% between 2003 and 2006 and by 68% from 2012 to 2018, while purchase volume rose in both periods, more than doubling in the second. The post-COVID rate increase has not had the same effect. Since 2021, refinance volume has fallen by 73% and purchase volume by 27%. Purchase activity absorbed the shock in the prior two cycles. It didn’t in this one.

Originations reached $1.69 trillion in 2024 and $1.68 trillion in 2018. However, production expenses for IMBs rose from $8,278 per loan in 2018 to $11,076 in 2024, while margins fell from 14 bps in 2018 to 10 bps in 2024, against an average of 47 bps since MBA began the report in 2008. Matching 2018’s volume in 2024 cost IMBs a third more per loan for only a fifth of the industry’s long-run margin.

Built on behavior, not potential

These economics have driven IMBs to enter the home equity space, and they’re doing so with gusto, as they now hold more closed-end home equity loans than banks or credit unions. Their share of outstanding balances reached 42.4% in June, up from 36.6% a year earlier, compared with 33.5% for credit unions and 24.1% for banks. Rocket Mortgage topped the quarterly home equity origination rankings in the first quarter of 2026, the first time a nonbank has, with an estimated $3.05 billion, and all of it closed-end seconds.

Equity accumulation stopped being news several years ago. What has changed is what borrowers are doing with it. ICE’s August 2026 Mortgage Monitor reports that 47.5 million mortgage holders hold $11.7 trillion in tappable equity. Second liens accounted for 54% of all equity extraction in the first quarter, according to the June 2026 edition of the same report, which means borrowers are accessing that equity without disturbing the first lien.

The obvious objection is that this reverses when rates fall. Refinance volume doubled last year to $694 billion, and its share of originations climbed from 15% in 2023 to 33.9% in 2025. Freddie Mac has described the rate-lock effect as beginning to thaw, but ICE’s second-quarter data show that it is not borrowers with COVID-era first liens driving refinances. Loans written in 2025 accounted for the largest single share of activity at 21%, with the 2023 and 2024 vintages accounting for another 27%. Cash-out transactions made up roughly 63% of June refinances, so even that activity is equity extraction rather than a rate play. The 2020–22 cohort is doing something else, as nearly four million of them have added a second lien.

A permanent product on borrowed infrastructure

While popularity doesn’t always translate into profitability, that’s not the case with home equity. MBA’s 2025 Home Equity Lending Study puts the cost to originate a home equity loan at more than $4,500, and lenders active in the space report that home equity margins run higher than first-lien margins despite smaller balances.

For IMBs, the mechanical differences between home equity lending and first-lien origination are what can put that margin at risk. A home equity line of credit (HELOC) is more akin to a credit card in how it operates after closing, which is why borrowers expect it to be approved like one. While a closed-end second carries disclosure, valuation and settlement obligations closer to those of a first mortgage, borrowers also expect approval in days rather than weeks. Both products need a process built around them, yet most IMBs are running them through one built around something else.

The same MBA study describes what that costs. Roughly half of home equity applications close. Turn times average 39 days. Cost to produce has risen about 14% since 2020, the wrong direction for a product whose volume keeps growing. Every application that dies in week five was paid for in week one, and a better margin on a smaller balance does not go far against a 50% loss rate.

What stalls those files is rarely credit. Credit, valuation, title, flood and settlement orders each live in a separate system and get chased by a person. Valuation waterfalls that work on paper break down the moment a confidence score lands outside the band. Disclosure timing and content rules differ between a line of credit and a closed-end second, so document generation remains manual precisely where compliance exposure and calendar days overlap. Data gets re-keyed between the point of sale, the loan origination system and the pricing engine, a step nobody owns and therefore nobody measures. Each of these is a coordination failure, not a credit issue, and the category of problem that purpose-built systems exist to solve.

A lender treating home equity as a bridge to the next refinance wave can rationalize borrowed systems because the borrowing ends when the wave arrives. But a lender who has read the vintage data knows the wave is not coming for this cohort, and that borrowed systems become a standing cost against a standing product line.

The case for home equity no longer depends on what rates do next, which is what separates this cycle from the ones it keeps getting compared to. That makes this a standing product line rather than a surge to manage through, requiring lenders to close the operational gap to ensure long-term viability and success.

(Views expressed in this article do not necessarily reflect policies of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes submissions from member firms. Inquiries can be sent to Editor Michael Tucker or Editorial Manager Anneliese Mahoney.)