Transunion: HELOC originations expected to double in next five years

As homeowners continue to gain equity in their property due to rising home values, the credit bureau TransUnion is expecting a major resurgence in home equity lines of credit.

In a recent study, TransUnion determined that 67 percent of homeowners—approximately 60 million people—could be eligible for a HELOC. The credit bureau looked at consumer credit characteristics for these homeowners between June 2015 and May 2016.

TransUnion anticipates that about 10 million homeowners will start a HELOC between 2018 and 2022. This would be more than twice as many HELOC originations as the five-year period between 2012 and 2016, when 4.8 million HELOCs were started.

There were 4.9 million HELOC originations in 2005, when aggregate home equity in the United States stood at about $13.3 trillion. When equity dried up in the wake of the housing crisis and Great Recession, HELOC originations shrank dramatically. In 2011, there were only about 600,000 HELOC originations against $6.3 trillion in equity.

The number of HELOC originations has increased steadily since this point, reaching 1.2 million in 2016. However, TransUnion says it has not kept pace with the recovery in home values. The Case-Shiller Index home price index stood at 194 in July, 14 points above the index for 2005, and is expected to exceed 200 in the coming years. Aggregate home equity reached the pre-recession point of $13.3 trillion in 2016.

"There are many dynamics in play as to why consumers were not opening HELOCs at a greater rate," said Joe Mellman, senior vice president and mortgage line of business leader at TransUnion. "One driver may be the 'hangover effect' of a once-in-a-lifetime mortgage crisis. Another factor could be limitations in supply, as many lenders exited or reduced their HELOC operations during and after the last recession. Other factors such as competition from other credit products—like the remarkable surge in personal loans over the past few years—doubtless also have had some impact. But we believe those effects have and will continue to abate, allowing for a resurgence of this compelling credit product."

TransUnion believes that there will be about 1.4 million HELOC originations in 2017 and 1.6 million in 2018. It expects that 8.4 million HELOC originations will take place between 2019 and 2022.

A HELOC essentially allows homeowners to use the equity in their home as collateral to borrow a certain amount of money. The financial site Bankrate says borrowers typically need to have more than 20 percent equity in their home, a good credit score, and sufficient income to make monthly payments on the loan.

The term of a HELOC can extend for 20 years or more. It must be repaid in full by the end of a term, although it can be repaid early. The financial site Investopedia says a HELOC has a draw period where the borrower only needs to pay interest or make other minimal contributions each month, followed by a repayment period where the principal is paid down.

HELOCs are often used to invest in repairs or renovations to the home, which in turn can help improve its value. However, borrowers can use the money for other purposes as well, such as paying for college costs or knocking out other debts. The key risk of a HELOC is that a lender can foreclose on the property if the borrower fails to pay it back in full.

TransUnion found that 30 percent of HELOCs opened during its study period were used to consolidate a homeowner's debts, typically to a lower interest rate. Twenty-nine percent were used to finance a large project such as a home improvement project, while 25 percent refinanced an existing HELOC to get better terms or rates.

Nine percent of HELOC originations occurred concurrently with the start of a mortgage, often to use it as part of a down payment. Seven percent of HELOCs had not been drawn upon and were apparently being kept on standby as a "rainy day" source of funds.

"HELOCs have traditionally been a popular credit product because their interest rates are generally low, the interest is usually tax deductible, and consumers can receive large lines of credit," said Mellman. "One of the reasons these lines dried up is that a consumer must have both home equity and good credit – the former of which virtually evaporated during and post-recession, but both of which have improved greatly in the last few years."

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