Lenders struggle with higher workloads and declining pull-through rates
Home equity lenders were doing more work for fewer loans as origination volume remained relatively flat in 2023, according to the Mortgage Bankers Association’s (MBA) new home equity lending study.
The study revealed that total originations of open-ended Home Equity Lines of Credit (HELOCs) and closed-end home equity loans increased by only 1.5% compared to the previous year, while debt outstanding rose by 8.3%.
“Home equity originations were relatively flat in 2023 compared to 2022,” said Marina Walsh, vice president of industry analysis at MBA. “Even with evidence of easing credit availability, with originations activity moving to lower FICO credit scores, higher combined loan-to-value ratios, the closings to applications pull-through rate dropped, indicating that home equity lenders were doing more work for fewer loans.”
Total originations increased marginally from $2.10 billion per company in 2022 to $2.13 billion in 2023. The study noted a shift in borrower usage, with home renovations declining from 65% of volume in 2022 to 56% in 2023, while debt consolidation grew from 25% to 33%
For HELOCs, the average commitment volume decreased from $1.9 billion per company in 2022 to $1.8 billion in 2023. The average FICO score for HELOC borrowers dropped from 769 to 760, and the average combined loan-to-value (CLTV) at closing increased from 51% to 53%. Notably, the closings-to-applications pull-through rate for HELOC accounts fell from 56% to 48%.
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Home equity loans saw an increase in average originations from $428 million per company in 2022 to $657 million in 2023. The average FICO score for these loans decreased from 752 to 742, while the average CLTV at closing rose from 58% to 62%. The closings-to-applications pull-through rate for home equity accounts also declined, from 44% to 39%.
“Despite the tepid volume growth in 2023, our study shows an uptick in home equity debt outstanding,” Walsh said in the study. “The elevated mortgage rate environment slowed servicing runoff, and utilization rates also increased. Given the substantial amount of accumulated equity in real estate, there is still untapped potential for home equity lending for lenders and borrowers.”
The study also revealed that over 75% of total originations in 2023 were subject to an Automated Valuation Model (AVM) or Desktop Valuation (DV), with most requiring minimal or no inspection. Only 22% of originations required a full appraisal.
Looking ahead, lenders expect HELOC debt outstanding to increase by 2.3% in 2024 and 4.8% in 2025. For home equity loans, the projected increases are 11.1% in 2024 and 7.2% in 2025.
The MBA’s Home Equity Lending Study, conducted in spring 2024, collected data representing $29.8 billion in originations volume for 2023, $184.5 billion in maximum credit extended to borrowers, and $77.2 billion in outstanding borrowings as of Dec. 31, 2023.
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