For instance, the average balance for a new home
equity line of credit (HELOC) is slightly higher than
$121,000, but hovers around $40,000 for subprime
borrowers (from the January 2016 Equifax National
Consumer Credit Trends Report). Also, the share of
subprime borrowers getting a HELOC is tiny – 1.5%
in terms of the total numbers and just half a percent
in terms of the total balance. However, HELOCs are
appealing to lenders because they’re generally small
balance loans, relatively inexpensive, and do not include the regulatory requirements of a first mortgage
or home equity loan. The catch is that the borrower
can max out the credit line and then possibly have difficulty making repayments. In addition, issues can arise
at the end of the term when the loan amortizes and
induces payment shock.
Home equity loans differ in that the loan amortizes from day one, the interest is fixed, and the payments are added into the monthly mortgage payment.
Underwriting is completed for a specific loan amount
at the very beginning of the process. There’s a lot of
benefit to borrowers with a home equity loan, including no payment shock. However, the underwriting
standards for a home equity loan are essentially the
same as with a first mortgage. These loans are also
low-balance, meaning the underwriting costs make
up a higher percentage of the total loan amount. In
addition, home equity loans generally require stronger
verification of ability to repay (ATR) and are subject to
the Qualified Mortgage (QM) rules. Lenders retain a
portion of the risk on their balance sheets, regardless
of who the servicer is for the loan. Simply put, home
equity loans come with a higher regulatory burden
than HELOCs do and, with the mortgage insurance
industry performing well, lenders tend to be more
than happy to let mortgage insurers assume the risk.
Some larger lenders are exiting the home equity
lending market altogether, which could make it harder
on subprime borrowers, who represent less than 11
percent of home equity loan accounts and six and
one-half percent of total balances (from the January 2016 Equifax National Consumer Credit Trends
Report). So, while home equity loans may be more
suitable for borrowers with credit problems, the
regulatory costs and underwriting burdens in some
instances make them very expensive to originate.
So, what does this all mean for 2016? The need for
home financing persist and demand will likely remain
steady throughout the year, but there will likely be a
change in the types of loans available due to a shrink-
ing market for home equity lending. This may mean
that subprime borrowers will take out more first
mortgages with higher mortgage insurance costs and
also that the HELOC market will expand. Turmoil in
the global markets is causing long term interest rates
to decline, which is extending the refinance activity
further and further. And finally, delinquency rates are
staying down thanks to the continued improvement in
consumers’ repayment behavior.
Amy Crews Cutts is the Chief Economist for Equifax
where she conducts research relating to the consumer
wallet – assets, income, credit, and spending along with
macroeconomic factors affecting the consumer. She is
also responsible for macroeconomic forecasting, advising
the Senior Leadership Team on U.S. and global events
relating to the company's interests, and representing
Equifax with clients, the media, and the industry. Prior to
joining Equifax she served as Deputy Chief Economist for
Freddie Mac from 2003-2011.
