Never Jump Blindly: Opportunity and Risk in the 2022 Home Equity Market
With tappable equity hitting yet another all-time high in Q2 2022 and a record-low population of potential refinance borrowers, many lenders are going all-in on home equity lending in hopes of filling the revenue void. In fact, HELOC lending jumped 30% in Q2, hitting its highest level in 12 years, according to the latest McDash® Home Equity loan-level performance data from Black Knight.
This is good news for homeowners looking to tap into available equity without sacrificing the historically low rate on their primary mortgage. On average, homeowners have $217K in equity available to borrow against while still maintaining a 20% equity stake in their home. They’ve been judicious with withdrawals as well – just 1.1% of all available tappable equity was withdrawn in Q2, the lowest share since 2005.
Sharply rising 30-year rates drastically reduced cash-out refinance demand, but also increased demand for less expensive home equity products. And while the instinct to seek out new business lines is a good one, lenders should be sure they’re taking a measured and informed approach given current economic and affordability conditions. The impact of rising rates, and the drivers behind them, can create risk for those holding second lien debt.
For example, we’re seeing home prices beginning to pull back from recent peaks amid the worst home affordability levels in more than 35 years. July saw the first month-over-month home price decline in nearly three years. In fact, the Black Knight HPI shows that 85% of markets saw home prices decline in July, with 1 in 5 markets seeing prices drop by 3% or more in recent months. In San Jose, Calif., prices have already fallen 10% from the most recent peak.
Such price declines have an oversized impact on homeowner equity – about twice as pronounced. For example, a 5% decline in home values nationally would equate to a 10% decline in tappable equity, and so on. Nationally, tappable equity has fallen by more than 5% over just June and July alone. After 10 consecutive record highs driven by unprecedented – and ultimately unsustainable – home price appreciation, we are likely on track to see the first overall quarterly decline in tappable equity in three years this quarter.
Although the market is on a strong footing to absorb home price declines – with total mortgaged leverage about 42% of the underlying properties’ values, another record low – mortgages originated in 2021 and 2022 are among the few that would face equity challenges if prices were to fall. Under scenarios where home prices dipped by up to 15%, 90% of mortgage holders who would become underwater bought their homes in 2021 and 2022 – at or near the top of the market.
Fears of recession persist as well, with many eyeing the horizon for deterioration on the mortgage performance front. As of July, delinquency and foreclosure rates were both still well below pre-pandemic levels. Though borrower performance has been historically strong in recent years, equity lending market participants will nevertheless want to maintain visibility into loan level metrics for any signs of future credit risk.
So, while the rate environment and current strong levels of equity may suggest now is a great time to jump into home equity lending, it’s important to do so in an informed manner, with these and other market risks in mind. To that end, Black Knight offers data and analytic tools that could be particularly valuable in the current market, including the Black Knight Home Price Index, our AFT HELOC performance model, and the McDash Home Equity dataset, to help track local price trends, assess performance risks, and review historical and ongoing performance.