Banks tighten lending to nervous homeowners hoping to tap equity

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Market condition: severe. That’s Bank of America’s new assessment of a corner of the U.S. mortgage industry facing a deluge of applications from homeowners looking to shore up their finances.

The coronavirus pandemic, which is prompting nervous Americans to tap into record amounts of home equity as a buffer against an economy tipping into recession, has also led Bank of America to aggressively tighten its standards for home equity lines of credit, or HELOCs. Wells Fargo has taken similar actions, and JPMorgan may change its policies, too.

Homeowners looking for ways to build up a cash cushion while capitalizing on interest rate cuts by the Federal Reserve can do so through HELOCs — open-ended credit lines that use properties as collateral — or through cash-out refinancings. But banks are getting choosier about underwriting HELOCs, with the aim of ensuring that customers will actually use the loans rather than hoarding the money for a rainy day.

Applications for home equity loans and lines of credit jumped as much as 33% from a year earlier in recent weeks, before stay-at-home orders cut application volumes, according to data from Informa Financial Intelligence. At Nations Lending, which originated some $2 billion of mortgages last year, applications for cash-out refinancings have doubled, a spokesman said.

The surge in applications comes as economists warn that the U.S. economy will contract as a result of government-imposed shutdowns to stem the spread of the deadly coronavirus, putting millions of people out of work and erasing trillions of dollars of wealth.

“If you’re a homeowner, you’ve always been told that one of the easiest ways to access cash in a pinch is to tap the equity in your home,” Nations Lending Chief Executive Jeremy Sopko said in an email. “In a normal environment, this is absolutely true. But this is no normal environment. And so fear is building.”

But at big banks, the worsening economy is leading them to restrict who they’ll lend money to, one illustration of how banks are working to bolster their balance sheets ahead of the coming downturn.

Bank of America significantly tightened its standards for loans to homeowners wanting to borrow against their equity, ratcheting up an internal gauge that measures market conditions from the company’s lowest level to its highest, “severe,” according to records reviewed by Bloomberg. The minimal credit score it’ll accept from borrowers is now 720, up from 660.

JPMorgan, meanwhile, may boost its minimum credit score for new HELOCs to 720 as well, up from 680, and is also considering other changes, such as limiting approvals to customers who already have a mortgage or checking account with the bank, said a person with knowledge of the matter. The bank’s goal is to slash application volume by as much as 75%.

Wells Fargo cut the maximum amount homeowners can borrow and reduced how much the bank will lend relative to a property’s value, according to a person with knowledge of the changes. The bank is applying stingier valuations to homes due to a lack of inspections and appraisals resulting from the pandemic.

Representatives for Bank of America and JPMorgan declined to comment. A Wells Fargo spokesperson said the bank is “focused on continuing to support our customers and meet their needs, while appropriately managing risks in the current environment.”

The banks’ move to limit loan approvals for homeowners stands in contrast to their lending to businesses, which increased almost 13% last quarter, according to figures from the Bank Policy Institute, a trade association representing large financial firms.

HELOCs function like credit cards, with lenders setting a maximum amount homeowners can borrow at any one time. Their use exploded in the years leading up to the housing crash more than a decade ago, as surging property values prompted homeowners to use their dwellings as piggy banks. HELOC borrowing dropped off after the housing bubble burst and scarred homeowners sought to reduce their debt.

The property recovery since then has inflated homeowners’ net worth, leading to a record $6.2 trillion of housing equity that U.S. homeowners could borrow against as of December, the highest ever year-end total, according to the analytics firm Black Knight.

The average homeowner has about $119,000 in equity to use as collateral, Black Knight figures show. For residences with a mortgage, homeowners collectively owe the equivalent of 52% of their homes’ value, making their properties prime targets for taking out loans against.

“The uncertainty around the depth and length of the economic contraction caused by the coronavirus is prompting people to act,” Tendayi Kapfidze, chief economist at the online marketplace LendingTree Inc., said in an email. “Having a line of credit available can be a buffer against loss of income or employment, an insurance of sorts.”

Bloomberg News