Slowdown in home equity lending raises questions for 2020

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There’s rising uncertainty about how a sizable piece of the credit union industry’s loan portfolio will perform in the year ahead.

First mortgage volumes continue to rise at credit unions, but home equity lines of credit have fallen dramatically in recent years, dropping from 7.8% growth in October 2017 to 4.9% a year later and just 1.8% in October of this year, according to the latest Credit Union Trends Report from CUNA Mutual Group. Growth rates for second mortgages – which tend to be closed-end loans rather than open ended lines of credit like a HELOC – are also down, though not a significantly. Second mortgage growth was at 9% annually as of October, down from 10.6% one year prior.

The drop in home equity activity may be in line with other recent consumer trends.

Data from the Federal Reserve Bank of New York shows home equity lines of credit have fallen by almost 50% in the last decade, with those declines partly driven by consumer fears following the Great Recession. A recent report from Redfin also shows more consumers staying in place, sticking around in their homes for an average of 13 years in a push to build equity, though the report notes that’s partly driven by a lack of affordable housing.

“People got burned before because they were loaning money against a property where the value was inflated,” said Eric Bugger, chief lending officer at Wright-Patt Credit Union in Beavercreek, Ohio. “We didn’t necessarily see that here in the Midwest nearly as much as the sand states did, but we did see some of it. When people lost the value they said, ‘Why am I paying all this money on an asset that’s not even worth as much?’” Having lived through that, many consumers now are hesitant to lend against their existing equity, he added.

Credit unions held just under $560 billion in residential real estate loans as of October, according to CUNA Mutual. Home equity lines and second mortgages accounted for 16.7% of that total. While total mortgage lending at credit unions has increased by 17.8% in the last two years, HELOCs and seconds have dropped by about one percentage point as a portion of total loans, despite an 11% ($9.8 billion) increase in volumes.

Wright-Patt has seen a slight drop off in home equity lines this year but that has been made up for by increases in other real estate-secured lending. “Three months ago we saw a pretty significant surge in refinances of first mortgages, so instead of using a second mortgage product, first mortgage rates were so low that people refinanced their first, and they hadn’t done that for a while because we had such low rates from the previous refi boom,” said Bugger.

Wright-Patt members are deleveraging and not borrowing as much as they used to, he added. Much of that is tied to insecurity about long-term home values.

“We know boomers make up the largest share of homeowners, and the majority of boomers are either really close to or in retirement age, so that might put people off from taking out loans on a home that they might be planning on selling in the next five years or so,” suggested Francesca Ortegren, a research analyst at Clever Real Estate. She added that millennials and Generation X haven’t bought homes at the same rate as previous generations. Although millennial homeownership is on the rise, many members of that generation may not have enough equity built up to start taking out additional loans.

“Millennials are risk-averse in that way and have a lot more student debt, so they kind of have to take out fewer loans in other areas because they already have a lot of debt,” she said.

But one credit union executive suggested the recent decline in home equity line volumes was less about consumer sentiment and more about recent trends in the market.

“What you did see was a great run-up in equity lending from ’13 or ’14 on to ’17 and ’18 because home values were starting to come back…which causes the average consumer to say ‘My home is worth more, maybe there’s another option for debt?’” said Ray Lindley, chief operating officer at Boulder, Col.-based Elevations Credit Union and vice chair of the CUNA Lending Council. “So when you talk about growth rates, you’re comparing growth rates in ’19 to growth rates in ’16, ’17 and ’18 that were unsustainably high. It couldn’t go on forever at that rate.”

Home equity lending is still growing, he said, just not at the same pace.

While second mortgages and home equity lines are down in Elevations’ call report, many members have instead paid down their home equity lines of credit and refinanced first mortgages. And about 70% of the seconds and HELOCs that the credit union books go straight to the secondary market and never show up on a call report.

Recession coming?

While talk of a recession in the year ahead has cooled, one will come eventually. Lindley said whenever that happens, an economic downturn is more likely to impact credit union commercial lines rather than housing products, but “if it impacts job creation and employment, that will have a spillover into housing,” Lindley said.

“The scary part about the commercial and business space is that’s newer to credit unions,” he added, noting that CUs may not have the same level of experience with underwriting business lines as traditional banks. That means a credit union that hasn’t been underwriting prudently could find itself in a squeeze if the economy turns.

And, he added, if that happens writ large, it could give additional ammunition to the banking lobby’s claim that the credit union member business lending cap doesn’t need to be raised.

Clever’s Ortegren concurred that any economic crisis in 2020 is unlikely to have the same impact on the housing market as the Great Recession did.

Despite high consumer debt levels overall, she said, “people are taking out [home loans] that make more sense…People aren’t taking out five times their income [for a mortgage]. We also have low unemployment across the board, which helps with keeping up with mortgage payments, and we’ve seen lower delinquency rates in general on mortgages lately. Mortgages and the housing market might be safer than it was 10 years ago, but we are seeing an incline in credit card debt, so people are maybe being a little bit more cautious when it comes to mortgages and home lending, but not so much in other areas.”

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