Americans are tapping into their home equity at a pace not seen since the housing bubble aftermath nearly a decade ago, but here’s a key question: Is all this borrowing getting a little too frothy? Are we headed back to the bad old days when some owners hocked their houses to the hilt to finance autos, vacations and other consumer expenditures?
New data provided by national credit bureau Equifax reveal that between January and June of 2015, lenders extended more than 657,000 new home equity lines of credit — popularly known as HELOCs — with a total credit limit of nearly $70 billion. The number of new lines was up nearly 15 percent over comparable year-earlier levels and was the highest since 2008. The total dollar limit on the lines was 24 percent above the year before and the highest in seven years.
Not all these HELOCs are going to owners with great credit ratings: Through the first half of the year, 9,600 credit lines, with total dollar limits of $338 million, went to borrowers with subprime credit scores — defined as an Equifax Risk Score below 620. That’s a 30 percent increase over the previous year.
New home equity installment loans also are surging. In the first six months of the year, more than 354,000 home equity loans were originated — 23 percent above the same period in 2014. The total dollar amount of these loans exceeded $12 billion, which is close to a 20 percent increase year-over-year. More than 38,000 new home equity loans went to borrowers with subprime credit scores, 30 percent higher than the year earlier.
Meanwhile, cash-out refinancings are making a comeback, according to new information from giant investor Freddie Mac. During the second quarter of this year, 34 percent of all refinancings resulted in owners adding to their mortgage principal balances and pocketing the extra cash — $11.4 billion worth. That’s the highest quarterly rate for cash-outs since 2009 and is 35 percent higher than a year earlier.
So what’s going on here? Is there cause for alarm? First some basics. HELOCs are flexible lines of credit — second liens — tied to the equity in your home. If you’ve got a first mortgage of $200,000 and your house is worth $450,000, many banks will let you take out a credit line with a maximum draw of $75,000 to $100,000, depending on your credit scores and other factors. They often have floating interest rates and require no principal payback until a pre-set term, say 10 years. They are ideal for situations where you need periodic drawdowns rather than a big lump sum.
Home equity installment loans are second liens, but usually come with fixed rates and regular repayment terms. They are an option if you need a fixed amount of money to buy something requiring a single payment. Cash-out refinancings typically are for owners with significant equity stakes and good payment histories on the mortgage being refinanced. Lenders allow borrowers to increase their principal balance rather than leaving it as is or reducing it.
All three techniques tend to rise during periods of solid growth in home sale values and home equity. In the past year alone, according to the Federal Reserve, American owners’ equity stakes have swelled by $1.3 trillion — so there’s much more equity they can tap.
But hold on. Wasn’t increasingly heavy use of equity-based borrowing by owners an early danger signal during the boom? Absolutely. But lenders insist that underwriting is much stricter now, with full documentation of income, household debt, careful scrutiny of appraisals and lower borrowing limits.
“Today’s underwriting standards are very different,” says Sean Becketti, chief economist for Freddie Mac. “These loans are well underwritten and the steady increase in house prices is consistent with the rate of cash-outs we’re seeing.”
But what about all those home equity lines going to subprime borrowers? Amy Crews Cutts, chief economist for Equifax, told me the statistics about year-over-year gains can be a little misleading. HELOCs issued to subprime borrowers were up during the first half of 2015, she said, but still represented just 1.5 percent of all HELOCs originated during that period. In other words, 98.5 percent of HELOCs went to borrowers with relatively good credit — often those with high scores and lots of equity.
Thanks to today’s tighter underwriting, she said, “you have to be really awesome to get a HELOC.”
So if you have the equity and a legitimate need for the money — plus you’re pretty awesome — check it out.