The Mortgage Bankers Association’s (MBA) latest study on home equity lines of credit (HELOC) found that HELOC use declined in 2019 and is expected to fall again this year.
MBA said the uncertainty of the pandemic likely would continue hesitancy from borrowers in tapping into their home equity in 2020.
However, it expects that use will increase modestly in 2021. HELOC lenders expect annual originations to decrease 2.9 percent in 2020 but grow 10.8 percent in 2021. On a year-over-year basis, HELOC debt outstanding is expected to decline 3.0 percent this year and 2.8 percent in 2021.
“Households in 2019 remained hesitant to tap into the equity in their homes, despite several years of significant home-price appreciation resulting in sizable home equity gains,” MBA Vice President of Industry Analysis Marina Walsh said in a release accompanying the study. “The uncertainty from the COVID-19 pandemic will likely influence how originators manage risk, underwriting, and fulfillment in the home equity lending space. This only adds to the pre-existing challenges such as product competition and borrower preferences with unsecured financing and first-mortgage refinancing, rising costs of origination and servicing, and diminished tax benefits.”
The study examined closed-end home equity loans (HE loans) in addition to HELOCs.
It found that HELOC debt dropped 6.4 percent from the beginning of 2019 to the end of the year, as utilization rates declined. The utilization decline started in 2016 and has fallen each year through 2019.
For all active accounts, average HELOC utilization was 44 percent in 2019, down from 46 percent a year earlier. In addition, those who did take HELOC borrowers had higher credit scores (774, up from 762 in 2018) with lower loan-to-volume (LTV) ratios (24 percent, down from 28 percent).
On the HE loan side, debt outstanding dropped 7.6 percent over the course of 2019, as the average life of the portfolio fell to 90 months from 92 in 2018.
HE loan borrowers, like HELOC borrowers, had higher credit scores (759) and lower LTV ratios (30 percent) than they did in 2018 (749 and 37 percent). HE loan lenders expect originations to be flat in 2020 and grow 9 percent in 2021.
“Despite these challenges, home equity lenders expect to bounce back in 2021 and have ambitious plans for digital enhancements and initiatives to expedite the borrower experience. These initiatives are expected to help them better compete in the marketplace,” Walsh stated.
MBA’s study was conducted in the spring of 2020 and included data from 29 member companies representing $62.3 billion in originations volume for 2019.