Suffering from a lack of equity and blamed for playing a role in the housing crisis, home equity lending largely dried up during the Great Recession. However, it is coming back at both credit unions and banks as equity in some markets rises and rates remain low.
Back during the era of bad HELOCs leading up to 2006 and 2007, borrowers with already overvalued real estate would cash in their rising equity and spend the money on consumer goods, vacations, SUVs and bling. Real estate was king. Prices would keep going up, and all a savvy homeowner had to do was keep cycling between HELOCs and refinancing to turn his or her hardest of hard assets into cash.
Then came the crash, and as the bubble burst, paper equity vanished with it. After flying high in 2006, their peak year, HELOCs became the financial equivalent of the Hindenburg, plunging into foreclosure to serve as a warning to financial institutions for years. Until now, according to economists.
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"We're actually seeing home equity lending rise, both at banks and credit unions," Curt Long, chief economist at NAFCU, said. "It was up 20% last year alone," he added.
Long and other economists attributed the rise in HELOCs to a general rise in home equity as home prices recovered and let homeowners breathe a little in the gap between their mortgage balance and home value.
In addition, Long pointed out that the Great Recession prevented homeowners from funding the kinds of long-term maintenance and renovation that homes need. "I don't know how much, but I am sure there is some pent up demand out there driving some of this," Long said.
Additionally, Long pointed out that the strengthening economy was both giving consumers more confidence and helping to put people back to work, though wages have lagged from where they needed to be.
Daren Blomquist, a vice president at RealtyTrac, a nationwide real estate data firm, largely agreed.
"This recent rise in HELOC originations indicates that an increasing number of homeowners are gaining confidence in the strength of the housing recovery and, more importantly, have regained much of their home equity lost during the housing crisis," Blomquist said, speaking about the HELOC rise in 2014.
Nearly 10 million homeowners nationwide, representing 19% of all homeowners with a mortgage, had at least 50% equity in their homes in 2014, according to RealtyTrac data. Meanwhile, the percentage of homeowners with severe negative equity has decreased from 29% in the second quarter of 2012 to 17% in the second quarter 2014, according to the firm.
However, while the HELOC has come back, credit union executives explained the current HELOCs are more like second cousins to their previous versions than identical twins.
Two executives from the $812 million RTN Federal Credit Union in Waltham, Mass. explained how their 2015 HELOC differs from the HELOCs other financial institutions might have extended in 2006.
The 70-year-old credit union, which serves the employees of Raytheon and 600 other SEGs, originated roughly $30 million in first mortgage loans in 2014 and extended $24 million in HELOCs.
"We don't lend on 100% of the equity," Nicole James, senior vice president for retail services at the 50,000 member cooperative, said. She added that members whose mortgage loans are with the credit union can take out lines of credit on 85% of their equity, but the credit union limited members with mortgage loans elsewhere to 85%.
"We market the HELOC and we are competitive with them, but we are conservative in our underwriting," James said.
Moreover, when James said competitive, she did not joke. The credit union offers the credit lines at prime minus 50 basis points with a floor of 2.75% for the life of the loan.
"That is a very low rate," James observed, "but we have also discovered that the members who will open a HELOC with us are also much more likely to take our other lending products. They might have their mortgage with us, or a car loan or a credit card. The interest on the HELOC is not the most important part of the overall picture."
Cormac McCarthy, vice president and chief lending officer for RTN, also observed that the cooperative's members often took a conservative stance with the lines of credit.
"We have members who sometimes open a HELOC just for emergencies," McCarthy said. "They don't actually draw on it. They just like knowing they have it, in case they need it."
James chimed in that in the face of this development, this year the credit union had added a requirement for a minimum draw on the credit lines so that the cooperative could at least recoup the costs of offering and servicing them. James and McCarthy also took care to say that RTN's experience with HELOCs may not match that of other credit unions in other markets.
The Boston area that RTN serves never experienced quite the blow to its housing equity that other places did and experienced fewer foreclosures, they explained. As a result, less of the existing housing stock changed hands and homeowners largely refinanced their existing mortgages to the very low rates of the last five years.
This means the housing market is now very thin with little stock available, and bidding wars break out frequently when a house goes on the market, they added. In addition, the very low mortgage rates that many homeowners were able to obtain has meant they have not wanted to move and thus leave their low-rate mortgages.
"It is easy to ask why a homeowner just would not move when they had more equity in their homes," James said. "But in this tight market, unless they leave the area, where are they going to go? And they don't know if they can get the same low-rate mortgage on the new house that they have now."
This has meant the cooperative's members have taken out HELOCs as a way of making their existing homes better, McCarthy explained. Renovations, additions and necessary repairs have been very popular, he said, and the recent winter has led the credit union to expect a further HELOC boom in the late spring and summer.
"With the amount of snow and ice we got this winter, we believe a lot of HELOCs may be used to finance necessary repairs," McCarthy added.
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