CES, Fintechs & HEi Help Offset Drop in Bank HELOC Lending

Banks have scaled back their originations and holdings of home-equity lines of credit. But non-banks, credit unions and originators of closed-end seconds and home-equity investments have stepped up to the plate to fill the void. Much of the non-bank activity is being financed by the growing issuance of residential mortgage-backed securities.

Last year's U.S. HELOC production tumbled to less than $150 billion from more than $260 billion during 2022.

At last count, banks were responsible for a majority of the nation's HELOC originations. The largest eight home-equity originators among banks collectively cut their home-equity holdings by $1.7 billion in 2023.

Helping to offset the loss in bank HELOC activity have been credit unions, which boosted their HELOC holdings by $15 billion last year, and fintechs, which issued more than $5.5 billion in home-equity residential mortgage-backed securities during 2023, soaring from less than $1 billion the preceding year. A majority of the 2023 securitizations were HELOC transactions, though CES issuance has been on the rise so far this year.

During the fourth quarter, yields on HELOCs at credit unions were 8.43%. Banks were around 6 BPS higher, while HELOC RMBS yields were in the neighborhood of 250 BPS higher. The higher yields on RMBS reflect the less rigid standards and data-driven decisions for HELOC underwriting compared to banks.

Also rising to prominence in the home-equity industry are home-equity investments, also known as home-equity agreements, home-equity contracts and equity sharing. Currently there is little conformity between these products -- which might or might not include a junior lien or title to the property. What they do have in common is the ability to enable a homeowner to access their home equity without having to make a monthly payment or pay off a low-rate first mortgage.

Three HEi RMBS transactions were identified for last year, up from two in 2022.

Very similar to an HEi product is a second-lien reverse mortgage -- which also allows a low-rate first mortgage to remain in place, enables equity extraction for the homeowner, and doesn't require a monthly payment.

While overall home-equity lending has waned despite market metrics pointing to massive opportunities, many expect the sector to see increased activity during the second half of 2024.

Home-equity lending might be stronger, but first mortgage originators have been resistant to offering these products. They associate the amount of time spent on a first-mortgage transaction with the much smaller fee earned on a junior lien and don't see it as worth their time. But home-equity lending is far more automated than traditional lending, and several home-equity transactions can be closed in the same amount of time spent on a single first mortgage.