Mortgage borrowers collectively hold more equity in their homes than at any other time on record, but they've been slow to borrow against this newfound wealth, according to Black Knight.
Homeowners with an existing mortgage and at least 20% home equity held an additional $5.4 trillion in home equity in 2017, an increase of $735 billion from the previous year. The 2017 estimate is 10% higher than the pre-recession peak in 2005 and the greatest calendar year increase in Black Knight's records.
This bigger equity cushion means borrowers are less leveraged when taking on additional debt with cash-out refinances, home equity lines of credit or other second mortgage products and creates new opportunities for lenders seeking to make up for declining loan volumes.
Homeowners took out $262 billion in cash-out refis and HELOCs during 2017, a post-recession high. However, the percent of home equity borrowed against in the fourth quarter was only 1.25% of the equity available to homeowners, the lowest rate in four years, Black Knight said.
"While rising rates tend to dampen utilization of equity in general, the market is poised for a strong shift toward HELOCs, as they allow borrowers to take advantage of growing equity while holding on to historically low first-lien interest rates," Ben Graboske, executive vice president of Black Knight Data & Analytics, said in a press release.
From a credit union perspective, mortgage lending at CUs was down slightly in 2017, from $145 billion in 2016 to $141.5 billion in originations last year, a decline of about 2.4 percent, according to the March 2018 Credit Union Trends Report from CUNA Mutual Group. Home equity lending, on the other hand, rose by 9 percent, from $30.8 billion to $33.6 billion.
HELOCs are expected to increase on growing interest rates, which are projected to near 5% by the end of the year, Black Knight said.
"Over half of all tappable equity — approximately $2.8 trillion — is held by borrowers with credit scores of 760 or higher and first-lien interest rates below today's prevailing rate, which creates a large pocket of low-risk HELOC candidates," Graboske said.
The risk for cash-out refinance candidates also remains relatively low. In 2017, the average cash-out refi borrower had an average credit score of 744 and drew $68,000 in equity, resulting in a loan-to-value ratio of 66%.