5.11.2016 Home Equity Loan Balances Are Falling While Originations Grow

The good news on the home equity lending front is that origination volumes for home equity loans and HELOCs are on the rise. The not-so-good news is that the volume of these loans on the balance sheets of U.S. banks is declining as borrower paydowns exceed new loan originations.

The volume of home equity loans and HELOCs in the banking industry declined during the fourth quarter of 2015 for the 28th straight quarter. U.S. banks and thrifts held aggregate home equity loan and HELOC balances of $533.14 billion at the end of last year, down 1.5 percent from the previous quarter.

Big Banks See Biggest Declines

The declines were especially sharp at the four largest U.S. banks. At Wells Fargo, for example, home equity loan volume declined during the fourth quarter by $1.85 billion. The bank’s CFO indicated that this trend will probably continue in the future, calling home equity lending “sort of a going away business.”

Experts attribute some of these paydowns to the fact that the 10-year draw periods are coming due for loans and HELOCs that were made in the mid-2000s. At this time, these loans will become fully amortizing. Combined with rising interest rates, this could hit borrowers with a payment “double whammy,” as one industry insider put it.

Also, outstanding home equity loan balances are declining overall as borrowers refinance their first and second mortgages to take advantage of historically low fixed interest rates. On the positive side, last year was the fourth consecutive year in which overall home equity lending grew — it was up by 20 percent over 2014 to $146.1 billion.

Replacing the Runoff

As they seek to replace the runoff of home equity loans in their portfolios, some banks are increasing their appetite for home equity loan origination or buying whole loan portfolios, while others are loosening underwriting standards.

For example, one new online home equity lender allows well-qualified borrowers to take out up to 95 percent of their home equity via a HELOC and is approving HELOCs for borrowers with credit scores as low as 660. Overall, though, home equity lending underwriting and guidelines have remained fairly conservative.

Some banks are also ramping up their home equity loan marketing efforts to tap into the growing market of homeowners who have equity. This is helping these banks broaden their lending activity beyond just mortgages to buy new homes or refinancing existing loans.

Fundamental Market Shifts

A decade after the peak of home equity loan originations in the mid-2000s, it appears that the home equity lending market is undergoing some fundamental shifts. We’ll continue to keep you updated about these and other home equity lending trends in future issues.

We’re interested in hearing from you. What do you think about the current state of the home equity lending market? Send me an email at