Home equity lending activity rises 50% over two years

Borrowings for both open- and closed-end home equity products combined increased 50% in 2022 compared with two years earlier, as both house values and mortgage rates rose and the inventory shortage continued, the Mortgage Bankers Association said.

The average home equity line of credit commitment volume, the measurement of total credit offered, was $2.4 billion per company in 2022, up 41% from $1.7 billion in 2020 among lenders that participated in both surveys.

At the same time, average home equity loan originations were $780 million per repeater company in 2022, up 166% from $293 million in 2020.

This is the first time the MBA has released this study since 2020. An initial edition came out in 2019 and was conducted for the next two years. The organization took a break in 2022 — covering activities in 2021 — because of record-low interest rates, ample first mortgage cash-out refinancing opportunities and the temporary exit of some lenders from this business, the intro to the report said.

"Given the nearly $30 billion of accumulated equity in real estate, there is untapped potential for home equity lending for lenders and borrowers," Marina Walsh, the MBA's vice president of industry analysis, commented in a press release. "Respondents said consumer education, technological innovation, speed to delivery, and tailored products and marketing for specific customer segments are important initiatives for lenders to realize this potential."

HELOC balances, the amount of money borrowers withdrew from their accounts, on a weighted average basis grew to $112,113 at the end of 2022 from $108,231 when the year started. Yet, at the end of last year, 31% of all HELOCs did not have an outstanding balance.

While borrower credit scores for both products were still high, each declined in 2022 versus two years prior. For HELOCs, the average fell to 769 from 780, while for home equity loans, it was 752 last year from 768 in 2020. Just 7% of HELOC borrowers and 12% of home equity loan customers had a credit score under 700 during 2022.

It cost lenders an average of $4,133 to produce either type of home equity product in 2022, up from $4.023 in 2020. At the same time servicing costs fell to $304 from $362.

Home renovation or remodeling has always been the largest use for these borrowings, but that grew in 2022 to 65% from 60% in 2020 and 49% in 2018.

"The housing inventory shortage, combined with home-price appreciation and a low-rate first mortgage, make home renovations an attractive alternative for many homeowners who are looking to improve their spaces," Walsh said. "Additionally, a HELOC or home equity loan is one way to finance big home projects while receiving a tax advantage through the deductibility of mortgage interest."

But year-over-year spending on homeowner improvements and maintenance will shrink by 2.7% through the first quarter of 2024 and by 5.9% in the second quarter, the Joint Center for Housing Studies of Harvard University said in a July 20 report. It's July 2022 report noted remodeling spending was expected to soften during the 12 months going forward.

"The ongoing reductions in household moves will cause a decline in the remodeling and repair activity that typically occurs around the time of a home sale," Carlos Martín, project director of the Remodeling Futures Program at the Center, said in a press release. "The magnitude of the impact may be offset if owners who are locked into their current homes with ultra-low mortgage rates continue to renovate to meet changing needs or take advantage of new federal incentives for energy-efficiency retrofits." 

Debt consolidation or reduction was the use in 25% of the cases last year, versus 27% in 2020 and 38% in 2018.

An emergency or cash management made up 6% of cited use in 2022, with the rest for a down payment, financing an education or a big ticket purchase.

Going forward, survey participants expect a 1.87% decline in HELOC outstandings for this year compared with 2022, but 2.03% growth year-over-year for 2024. For the closed-end product, they expect growth of 17.5% this year and 3% in 2024.

Commitments for HELOCs, however, are expected to increase 8.15% for 2023 and 11.38% next year; for home equity loans it will grow 9.87% but drop by 5.58% respectively.