U.S. homeowners have a staggering $8.1 trillion in untapped equity in their properties, according to data service Black Knight Inc., but despite all that equity and a strong economy, banks are reluctant to write home equity loans, Bloomberg reports.
“Many banks are still wary of the risks of making home-equity lines of credit,” Bloomberg quoted Keith Gumbinger, vice president at mortgage-information company HSH.com, as having said. “For both banks and borrowers, cash-out refinancing can offer a very viable alternative for accessing the growing equity in their homes.”
Bloomberg cited data from Informa Financial Intelligence indicating that demand for home equity lines of credit, or Helocs, has fallen sharply since spiking in early 2020 as the pandemic took hold.
The attraction of Helocs for homeowners is powerful: they often offer rates better rates and higher limits than easily-obtained credit cards. For banks, however, they carry an extra measure of risk because if housing values fall at the same time borrowers — or in a worst-case scenario, foreclosing financial institutions — need to sell homes to pay bills, first mortgages are in front of banks that issued Helocs in lines of creditors.
“A lot of lenders even before the pandemic hit were kind of reluctant to be in that second-lien position,” Tendayi Kapfidze, chief economist at LendingTree, told Bloomberg. “And then certainly when the pandemic hit, that became a very significant risk factor that many lenders didn’t want to be exposed to.”
Among major banks cited by Bloomberg, Bank of America is providing Helocs, but JP Morgan Chase & Co. and Wells Fargo aren’t.
Many homeowners are turning to an alternative to Helocs through which they replace mortgages altogether and, in the process, withdraw what can be very significant sums of cash. Often called “cash-out” financing, the process offers homeowners the benefit of better interest rates in many cases because lenders are taking on less risk.