With declining refinancing activity from a 4-year high in July of 2016, and rising rates likely to continue that decline, many community banks have again turned to Home Equity Lines of Credit (HELOCs) as a strategic tool to drive loan growth.
In fact, the chart below shows that for banks under $10 billion in total assets, balances of HELOCs grew from $67.9 billion to $75.1 billion over the most recent six quarters – a growth rate of more than 10.5%!
Source: Stackfolio | Click for full interactive map.
Here are 3 reasons why we think that trend will continue in 2017.
1. Improving Credit of Homebuyers
It is no secret that the credit-worthiness of homebuyers in the run up to the recession was less than pristine when compared to the credit extended. However, the tightening of underwriting standards by financial institutions as well as consumer deleveraging have made credit levels of recent HELOC originations (and all other major asset classes) exceptionally strong. According to the CoreLogic Housing Credit Index Report (Fig 2.3) released in late 2016:
- Credit Score: The average credit score for homebuyers increased 5 points year over year between Q3 2015 and Q3 2016, rising from 734 to 739. In Q3 2016, the share of homebuyers with credit scores under 640 had dropped by more than three-quarters compared with 2001.
- Debt-to-Income: The average DTI for homebuyers fell slightly between Q3 2015 and Q3 2016, falling from 35.7 percent to 35.4 percent. In Q3 2016, the share of homebuyers with DTIs greater than or equal to 43 percent was about the same compared with 2001.
- Loan-to-Value: The LTV for homebuyers decreased about 1 percentage point between Q3 2015 and Q3 2016, declining from 86.8 percent to 85.6 percent. In Q3 2016, the share of homebuyers with an LTV greater than or equal to 95 percent had increased by more than one-fourth compared with 2001.
2. Rising Property Values and Limited Housing Supply
In most regions across the country, housing values and home equity have recovered or even exceeded pre-recession levels. See the chart below:
Zillow Home Value Index
Source: Zillow | Click for full interactive map.
In addition, the country’s largest metro-areas have seen housing supply remain at near historic lows. According to the Federal Reserve, the monthly housing supply as of January 2017 stood at 5.7 months. Because of this, many homeowners have chosen to improve their current properties versus upgrading to a bigger or better home.
3. Improve Net Interest Margin as Rates Rise
March marked the Fed’s first, of what many analysts think will be, multiple rate increases for 2017. For community banks, which continue to have high levels of liquidity and low-cost deposits, will be able to lag their liability costs while loan assets like HELOCs reprice higher. Currently, the cost of all interest bearing accounts at banks sit at 56 basis points while the average HELOC rate is a little under 6%.
As noted by one banker in a recent American Banker article, “We have to be competitive, and we will be, but we don’t have rush to the increased rates.”
So combining low-cost deposits with medium-term wholesale funding, such as FHLB fixed rate advances, represent an opportunity for community banks to lock in their costs and see net interest margins expand with this loan asset class.
Not looking to originate HELOCs? Stackfolio’s Marketplace can help.
While many community banks have a long history of originating HELOCs, some have opted to strategically acquire these assets from trusted sources like Stackfolio. Our powerful online marketplace for loan trading provides institutions with the tools and insights to find, analyze, and transact millions in HELOC loan assets and many other asset classes.
So let us show you how we can empower your institution to strategically add HELOCs as part of your loan growth strategy.
Founded by Allen Nance and Pavleen Thukral in 2015, Atlanta-based Stackfolio is a fintech startup that uses modern technology to serve a vibrant online marketplace for loan trading between financial institutions. The integrated data research platform helps institutions make sophisticated trading decisions.