Why Home Equity Loans Are Always So Hard To Get
Homeowners looking for a home equity line of credit, which is a revolving line of credit secured by a mortgage, might have a hard time finding them these days. Several major banks suspended issuance of these loans last year due to the pandemic and the resulting economic uncertainty.
But despite a recovering job market, a robust housing market and a record amount of home equity available to tap – $ 7.3 trillion through the end of Q4 2020, the highest amount never registered, according to mortgage technology and data company Black Knight – several banks have not taken over the origin of the Helocs.
Wells Fargo has put the creation of new Helocs on hold after April 2020 and has not determined when it could resume offering the product, according to company spokesperson Tom Goyda. âThroughout the Covid pandemic, Wells Fargo has continued to provide mortgages to customers looking to buy a home or reduce their monthly payments through refinancing,â Goyda said in an email. âAs the pandemic unfolded last year, Wells Fargo made a few changes that we believe have best served the interests of our customers in the long term and addressed health and safety concerns, credit and market risks and prudent balance sheet management. “
These changes included the suspension of the Heloc origins. And, while Wells Fargo has since waived most of the underwriting limits it put in place and resumed origination of cash refinances, the Helocs are still on hold, Goyda said.
Wells Fargo has joined JPMorgan Chase & Co., which temporarily suspended applications for new Helocs in April 2020. Chase, who declined to comment, says on his website that due to the economic uncertainty created by Covid, it temporarily not accepting new home applications – equity lines of credit to protect both the consumer and the bank. Citibank’s website contains similar language regarding its suspension of Heloc applications after March 3, 2021, due to “current market conditions”.
But while other lenders have cut back on their Heloc programs, Bank of America Corp.
continued to lend, but with stricter credit standards. These standards have since been relaxed.
“We were also informed of the lessons of the financial crisis, where equity quickly eroded.“
âLast April, at the onset of the pandemic, we saw rising unemployment, declining consumer confidence and concerns about the stability of the housing market, and there was fear of a severe and prolonged recession. Said Ann Thompson, Retail Sales Manager, West. , consumer loans for Bank of America. âWe were also told the lessons of the financial crisis, where equity quickly eroded and some clients defaulted on their second-largest debts.â
Since a Heloc is usually a second mortgage on a home, in the event of foreclosure, the holder of a second mortgage is not paid unless there is sufficient equity in the property after the first has been paid off. mortgage.
Bank of America initially mitigated its risk by implementing stricter credit standards, increasing applicants’ FICO scores, and lowering the maximum debt-to-income ratio. He also stopped lending to borrowers who were not existing bank customers. âWe felt comfortable lending to our own clients with the reduced guidelines,â Ms. Thompson said. âWith the reduction in the loan-to-value ratio and the maximum loan amount, we felt that lending to our own clients was responsible. “
In the first quarter of 2021, due to improved economic prospects and vaccine roll-out, the bank began reducing these requirements to pre-pandemic levels, making it easier for borrowers to meet its standards. and qualify for a Heloc.
âThere is pent-up demand for the Helocs,â Ms. Thompson said. âIt’s a customer opportunity that we want under our guidelines. “
Mortgage industry experts are speculating as to why banks may have left the Heloc market last year. âThere were concerns about the risk, but also operational challenges as some of the big banks saw huge waves of refinancing demand last year,â said Mike Fratantoni, chief economist of the Mortgage Bankers Association. “Some of them have moved staff who previously worked in the private equity business to work on the refinancings.”
Mr Fratantoni said there were also capital reserve and liquidity requirements that have encouraged banks to turn their attention to other products, such as cash refinances, and borrowers are turning away from Helocs. âThe psychology of the owners has changed a bit,â he said. âClients seem a little more hesitant to tap into their home equity. That is why we expect very modest growth from Helocs.
Industry experts expect the Big Three national banks to resume offering Helocs, but the product will be rolled out cautiously. âI would expect lenders to slowly start making Helocs, but only where they are already number one,â said Tendayi Kapfidze, chief economist at LendingTree. “Then if someone defaults, the risk of loss is pretty low.”
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