U.S. homeowners spooked by the burgeoning pandemic last spring rushed to tap equity in their properties for a hit of ready cash—and equally wary banks tightened credit or halted lending in response.
In the past year, monstrous demand for homes amid a scarcity of listings pushed up prices to the point of giving owners more collective equity than they’ve ever had before: $8.1 trillion, according to data provider Black Knight Inc.
But despite the roaring housing market and economic recovery, lenders are still keeping a tight grip on home equity lines of credit, or Helocs, a primary way borrowers can turn value stored in a home into cash. Chalk it up to lessons learned from the last real estate crash, and other options for homeowners that may be less costly given today’s historically low mortgage rates.
“Many banks are still wary of the risks of making home-equity lines of credit,” said Keith Gumbinger, vice president at mortgage-information company HSH.com. “For both banks and borrowers, cash-out refinancing can offer a very viable alternative for accessing the growing equity in their homes.”
Demand for Helocs has tumbled since the beginning of the pandemic, with application volumes last month totaling about half that of March 2020, when homeowners raced to obtain credit lines, according to data from Informa Financial Intelligence.
A Heloc functions like a credit card, with a consumer’s home equity serving as collateral. It makes sense for people who want to be able to tap into a reserve of credit as they need it instead of receiving a lump sum, as with a cash-out refi or other types of loans. That made it logical for homeowners to reach for Helocs as a security blanket while the coronavirus swept across the U.S.
The catch is that for banks, a Heloc is riskier than some other forms of lending because it’s a second lien—meaning it would be paid off after primary-mortgage obligations, creating the potential for losses if something goes wrong.
“A lot of lenders even before the pandemic hit were kind of reluctant to be in that second-lien position,” said Tendayi Kapfidze, chief economist at online loan marketplace LendingTree. “And then certainly when the pandemic hit, that became a very significant risk factor that many lenders didn’t want to be exposed to.”
That skittishness dates back to the financial crisis, when plummeting home values lashed banks with billions in second-lien losses. Reforms introduced after the crash ensure underwriting is sturdier than it was back then, with homeowners facing stricter limits on the amount of equity they can borrow against, as one example.
Even so, some of the largest lenders opted to pull away from the Heloc market last spring rather than stick around and learn whether the potential economic fallout of the pandemic could lead to similar losses.