The 1960 Ray Charles lyric — “Them that’s got are them that gets” — rings true today in the U.S. mortgage market.
Lenders increased their origination of home equity lines of credit, or Helocs, by 21 percent in the 12 months ending in June, data firm RealtyTrac Inc. said. The 797,865 Helocs given in the period represent the highest level since 2009.
Bank of America Corp. and other lenders are providing more Helocs, often to their existing customers at reduced rates, as rising prices gives them more equity in their homes.
At the same time, banks have been cutting lending for home purchases after imposing stiff requirements on borrowers to comply with new regulations and stem losses from the 2008 housing crash. Many younger Americans, who often have lower credit scores, have been shut out of the market.
“This is an opportunity for the banks to offer an additional product to those homeowners they see as already well qualified and have that equity,” said Daren Blomquist, vice president of Irvine, California-based RealtyTrac. “Helocs are a way for them to actually expand their mortgage businesses rather than have to cut back.”
Janet Gels, 66, said she closed on a $30,000 Heloc last month and is using some of it to cover the costs of turning her home in Coldwater, Ohio, into a bed & breakfast. Gels said she’ll hold some of the credit line in reserve for “hidden costs” that could arise.
“If we don’t use it, we don’t pay interest on it,” she said. “That’s one of the things I like about a Heloc — you can spend some of it now, and hold the rest in reserve.”
Gels said a jump in local real estate values helped persuade her it was a good time to get the loan from Peoples Bank Co. The average value of a home in Coldwater, a town of about 4,500 people in western Ohio, was a record $220,000 in August, according to Zillow Inc., a real estate data company in Seattle. That’s a 38 percent gain from two years ago.
Bank of America expanded its Heloc marketing efforts in 2013 with direct mailers, said Matt Potere, a home equity product executive at the Charlotte, North Carolina-based lender. In June, the bank began offering interest-rate discounts on Helocs to customers if they have at least $20,000 in deposit or investment accounts. They get 0.13 percentage point off their rate, while those with $50,000 in accounts get a 0.25 percentage point discount.
Existing customers also don’t have to pay origination and annual fees and closing costs for a Heloc, Potere said. About 85 percent of the bank’s home equity customers are existing clients, he said.
Bank of America, the largest Heloc provider, increased volume of the loans by 75 percent to $4.6 billion in the first six months of this year from a year earlier, according to Inside Mortgage Finance, a trade publication.
“As the housing market continues to recover, customers have more equity, and as consumer confidence in general improves, you see increased demand for home equity products,” Potere said.
JPMorgan Chase & Co., the third-biggest Heloc originator, had a 45 percent increase in the loans in the first six months of the year, Inside Mortgage Finance data show. Some of the demand is coming from borrowers who originally took out a Heloc 10 years ago and are nearing the end of their opportunity to draw on it, so they want to refinance the line of credit, said Jim Manelis, a home equity executive at the New York-based lender. Home renovations are the No. 1 use for Heloc funds, followed by debt consolidation, he said.
JPMorgan Chase customers with checking accounts are eligible for discounts on the interest rates charged for Helocs.
“I definitely think people are interested in the product and the market itself is growing quite a bit, so as a result, you’ll see pricing improve,” said Manelis, referring to the industry.
As home equity lending surges, mortgages for purchases are declining. Banks have toughened lending rules to meet federal regulations and reduce the risks of having to absorb losses from buying back soured loans with underwriting errors from Fannie Mae and Freddie Mac. The Mortgage Bankers Association predicts purchase volume in 2014 to total $569 billion, a 13 percent drop from 2013.
First-time buyers are struggling more than most to get financing. Origination of loans insured by the Federal Housing Administration, which are often made to new homebuyers, fell more than 26 percent in the 12 months ending in June compared with a year earlier, RealtyTrac data show.
Helocs typically are held by banks in their mortgage portfolios rather than being sold to Fannie Mae or Freddie Mac and securitized. Lenders use Helocs as a hedge against rising rates because they increase in tandem with bank borrowing costs, said Keith Gumbinger, vice president of HSH.com, a mortgage data firm in Riverdale, New Jersey. Heloc financing costs usually are tied to prime rates, the interest charged by banks to their most creditworthy customers, with the addition of a margin predetermined by the lender that often is around 2 percentage points.
The national average rate for a $30,000 Heloc fell to 4.8 percent yesterday, matching the early-September figure that was the lowest since mid-2008, according to Bankrate Inc., an interest-rate aggregator based in North Palm Beach, Florida. For a $100,000 Heloc, the average was 3.91 percent.
Heloc volume is still 76 percent below its 2006 peak when there were 3.3 million lines of credit extended. Americans used their homes like credit cards to go on spending sprees during the 2000 to mid-2006 real estate boom, tapping their equity to buy cars, televisions and luxury cruises.
Lenders often would approve lines of credit that exceeded home values. One popular type of Heloc was a 1-2-5 loan that allowed the main mortgage combined with the home equity loan to total 125 percent of a home’s value.
“Prior to the housing crash, the Heloc market was like the wild, wild west,” said Gregory McBride, chief financial analyst with Bankrate.com. “If you could fog a mirror, you could get approved.”
Now lenders face a wave of possible defaults. In August, TransUnion Corp. released a report saying as much as 20 percent of Helocs worth $79 billion are at increased risk of default as their payments jump a decade after the loans were made.
Payments on some of those loans are switching this year from interest-only to include principal, causing monthly bills to rise more than 50 percent, according to the report. The 20 percent of borrowers most in danger of default are property owners with low credit scores, high debt-to-income ratios and limited home equity, said Ezra Becker, TransUnion’s vice president of research.
Standards for getting a Heloc are much tighter today, said McBride. Most lenders now require borrowers to have FICO credit scores of at least 700, on a scale of 300 to 850, and applicants have to fully document their finances, he said. The Heloc added to the borrower’s primary mortgage typically can’t exceed 80 percent of a home’s value, he said.
Homeowners will boost demand for Helocs into next year as they remodel their properties rather than move or pay off credit card and student loan debt, said Gumbinger of HSH.com.
“We’re arguably still in the early stages of an up cycle for home equity borrowing,” he said.
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