What’s the best home equity strategy for homeowners and lenders given 2023 rates & home prices?

The Urban Institute housing team founded and led by Laurie Goodman just offered some critical intel the home equity market. Here’s a few callouts homeowners and lenders must know, and a link to their full post is below. For context, I’ll start with a stat that’s not in Laurie’s piece.

– During the pandemic homeowners gained more than $3.51 trillion in “tappable equity.” This is home equity homeowners could take out of their homes and still have 20% equity left over (as defined by what mortgage data and software firm Black Knight).

– In total homeowners have $9.7 trillion in tappable equity as of 4Q22, per Black Knight. This gives homeowners plenty of options, and keeps the housing system stable.

– There are three ways to get at your equity: (1) refinancing your first mortgage and adding to the balance, but this option sucks now because your first mortgage rate is probably crazy low, and you’d have to take a rate at least 2% higher, (2) a home equity loan where you take out the whole balance you may need, and start paying interest on that balance day one, and the rate is also pretty high, and (3) a home equity line of credit (HELOC) where you only draw what you need when you need it and only pay interest on what you draw.

– Option 3 is the most flexible for homeowners. Banks dominate HELOCs, and median credit scores to get these bank HELOC loans are 775.

– Yet the median credit scores for homeowners taking cash out (using any of the 3 loan types above) dropped from 761 in 2020 to 691 now.

– So there’s a huge opportunity for nonbank lenders to serve this market. But unlike banks, nonbank lenders must be able to sell their loans after they make them (instead of leaving them on their balance sheets).

– To serve homeowners that need HELOCs, this will be a 2023 growth segment for lenders, and securitization is the answer. Wall Street will still have an appetite for securitizations comprised of nonbank-originated HELOCs of homeowners with lower but still-good credit and lots of equity — which preserves homeowner and systemic safety.

– Lenders reading this should hit the link for more on the securitization opportunity.

– As for all you homeowners looking for the the most responsible options to tap your home equity, here’s what you need to know:

– Nonbank lenders are mortgage brokers and mortgage banks. Many of them are household names, like Rocket Mortgage for example.

– These firms are as regulated as banks, and the “nonbank” monicker is sometimes used in negative ways, but all it means is that these lenders don’t take deposits. They just lend.

Good luck out there with using your largest investment — your home — as a financial tool responsibly, and please comment or reach out with questions.