It’s surprising how quickly times can change. In 2021, the mortgage industry set a new record for refinance volume: $2.3 trillion. But six months and three Fed-rate hikes later, the refinance market is rapidly shrinking and is now expected to close out 2022 down by two-thirds, according to a recent Mortgage Bankers Association forecast. The rapid decline of refinance lending is expected to usher in a return of home equity lending, a product category that for most of the last decade has been overshadowed by cash-out refinances.
The market conditions also support this shift: Currently, U.S. homeowners are sitting on more equity than ever before. Total U.S. home equity increased almost 20% in the first quarter to $27.9 trillion, according to the Federal Reserve. Moreover, tens of millions of homeowners have taken advantage of record-low interest rates to lock in first mortgage rates in the 3%-4% range. Today, 51% of all U.S. homeowners with mortgages have rates below 4%, according to Redfin. The conventional wisdom suggests that they will be reluctant to refinance their “bargain” first mortgages to tap their equity.
Instead, lenders expect house-rich homeowners to opt for smaller Home Equity Lines of Credit (HELOCs) when they need to write a big check for home renovation, a tuition bill, credit card consolidation, etc.
Banks and credit unions are expected to take the early lead in this shift to home equity, since they have the ability to hold these assets on their balance sheets and have experience in servicing these loans. But some fintech players are already offering HELOCs, and mortgage banks are actively exploring investor and secondary market options that will enable them to get into the mix.
While home equity lending is definitely an opportunity, it’s one that comes with challenges. The first is risk. Make a mistake on a HELOC and unlike with first mortgages, foreclosure may not be a viable option. The second challenge is cost. Consumers expect these products to come with no, or at least only minor, origination costs—making them low-margin products for lenders. As a result, speed and cost-efficiency take on even greater importance in home equity lending.
With this in mind, First American Data & Analytics recently introduced FraudGuard® Home Equity, a new fraud tool designed specifically for home-equity risk assessment.
The solution is a streamlined version of our FraudGuard first-mortgage suite. It essentially consolidates all the different tools that a lender normally would run separately to originate a home equity product, including AVMs. These include assets/liabilities, property valuation, identity validation, occupancy, agency watch lists and HOA associations. Additional custom alerts to workflow, such as debt monitoring, can also be added.
Our new solution allows lenders to close quickly on home equity opportunities without sacrificing speed or agility or adding significant cost to these originations. While the refinance well is drying up, with the right partners and tech at their disposal, lenders now have a significant opportunity to capitalize on home equity lending.
FraudGuard Home Equity is already in use with several national HELOC lenders – and your business could be next. Schedule a demo today and learn how FraudGuard Home Equity can help save you time – and money – on your HELOC opportunities.