November 1st, 2021 12:32 PM by Richard Sardella MLO.100007700/NMLS 233568
Lender PTSD: HELOCs fast becoming a relic of the past
Just as humans experience bouts of post traumatic stress, so do lending institutions, dating their fears all the way back to 2008, when the foreclosure crisis hit. Such is the case of the all-but-gone HELOC, or equity line of credit.
Homeowners looking around for this type of loan are often coming up dry these days, searching in vain on lender web sites for this once-common way to finance a renovation. Realtor’s Sally Jones explains the once-popular loan program: “In a nutshell, a HELOC works as a second mortgage or lien on the home. Homeowners use their HELOC as a credit card of sorts, paying interest only on the money they withdraw for renovations.”
But Jones also explains how, according to real estate experts, the pandemic has lenders fearful of a repeat of the housing crash a few decades back. Lender PTSD? “Back then, many homeowners defaulted on their mortgages, prompting a wave of foreclosures and bankruptcies. Depending on other debts, there was often little or no money remaining for the issuer of the HELOC. The bank holding this second lien was often left holding the bag.” She goes on to remind us that at that time, many lenders were forced to take losses on the home equity lines of credit that were outstanding and as a result, lenders became wary of HELOCs because of their lack of secure qualities. That translates into the lien against one’s home being subordinate to the first mortgage.
Throw low interest rates into the mix, and many lenders are inundated with requests to refinance, making HELOCs an afterthought, while also leaving lenders bereft of capacity to include them. “In addition, HELOCs as a financial product are not as profitable, comparatively, for banks,” says Jones, who explains how HELOCs take the same amount of work to originate as a second mortgage, but with no guarantee that someone will use the line so the lender can make money. That means high upfront costs with no proof of return.
Are HELOCs gone forever? Not quite. Finding one is just more like finding a needle in a haystack. Buyers with good credit and a healthy equity cushion will always be in demand by lenders. But the fear lenders have regarding foreclosures is still alive and well, with mortgage forbearance (freezing mortgage payments for unemployed homeowners) offering them a taste of the past. With forbearance options having ended in June, some financial experts believe we have yet to see the aftershocks, thinking there may even be a wave of defaults on the horizon
Borrowers also have other ways to turn for home improvement fund relief. A cash-out refinance is when you refinance your original mortgage but take out a portion of your equity in cash. With low rates still in effect, a cash-out mortgage refinance may be the optimal way to tap into your equity.
How Rates Move:
Conventional and Government (FHA and VA) lenders set their rates based on the pricing of Mortgage-Backed Securities (MBS) which are traded in real time, all day in the bond market. This means rates or loan fees (mortgage pricing) moves throughout the day, being affected by a variety of economic or political events. When MBS pricing goes up, mortgage rates or pricing generally goes down. When they fall, mortgage pricing goes up. Tracking these securities real-time is critical. For more information about the rate market, contact me directly. I’m among few mortgage professionals who have access to live trading screens during market hours.
Rates Currently Trending: Neutral
Mortgage rates are trending slightly higher this morning. Last week the MBS market improved by +53 bps. This was enough to improve mortgage rates or fees. The MBS market was volatile last week.
This Week's Rate Forecast: Higher
Three Things: These are the three areas that have the greatest ability to impact your rates this week. 1) The Fed, 2) Central Banks and 3) Jobs.
1) The Fed: Will this be the Fed meeting where they finally (and officially) announce their "taper"? The FOMC will conclude two days of meetings on Wednesday and at 2 pm will give us their latest Interest Rate Decision and Policy Statement followed by a live presser with Fed Chair Powell. The bond market expects a taper at this meeting. But the variable is by how much? Estimates range from $10B to $15B reduction which would equate to $5B in MBS and either $5B or $10B in Treasury purchase reductions. We are also going to paying very close attention to their "taper" language. Last time, it was "set it and forget it" while this time we may see that they build in the flexibility to increase/adjust the purchases on the fly without any advance notice.
2) Central Banks: Its just our Federal Reserve that is in the spotlight this week. We get a key decision from the Bank of England. Two weeks ago, the bond market had shifted to expecting a rate hike at this meeting and now its back to a 50/50 probability. The Reserve Bank of Australia is also important this week as it is the first of the Central Banks to have a meeting and they stopped buying 2 year notes last week which was unexpected.
3) Jobs: We get a ton of job and wage related data this week with a report hitting every day, except Tuesday. The focus will be on Friday's Non Farm Payrolls and more importantly, Average Hourly Earnings.
This Week's Potential Volatility: High
We get a lot of economic news this week that can cause volatility in the market. The biggest of which is the FOMC followed by Big Jobs Friday.
If you are looking for the risks and benefits of locking your interest rate in today or floating your loan rate, contact your mortgage professional to discuss it with them.
Richard Sardella has been actively managing and providing services in the mortgage industry for over 27 years. Richard serves on the board of directors as President of Colorado Home Mortgages Inc.
All information furnished has been forwarded to you and is provided by thetbwsgroup only for informational purposes. Forecasting shall be considered as events which may be expected but not guaranteed. Neither the forwarding party and/or company nor thetbwsgroup assume any responsibility to any person who relies on information or forecasting contained in this report and disclaims all liability in respect to decisions or actions, or lack thereof based on any or all of the contents of this report.
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