Despite layoffs and wage reductions, industry observers say homeowners are avoiding using the equity in their homes during this challenging financial time. 

The mortgage data company Black Knight Inc. says Americans had $6.2 trillion in “tappable equity” during the fourth quarter of 2019. Tappable equity refers to the amount available to borrow before hitting a maximum of 80% of the home’s value.

The average amount of equity available during the first quarter of 2019 was $199,000, according to Black Knight, which is based in Jacksonville, Florida.

Meanwhile, approximately 25% — roughly 14 million homeowners — were considered “equity rich” during the first quarter of 2020. When one is equity rich, it means their mortgage balance is less than 50% of their home value, says Irvine, California-based Attom Data Solutions, a property data provider.

Several large banks nationwide, including JP Morgan Chase and Wells Fargo, which collectively have 28 branches and ATMs in the Inland Northwest, stopped accepting applications for home-equity loans and home equity lines of credit earlier this spring, citing current market conditions and economic uncertainty during the pandemic. 

Wells Fargo’s second-quarter earnings report states the bank’s consumer loans decreased $20.1 billion from the previous quarter, which was largely driven by a $16.7 billion decrease in first and junior lien mortgage loans “as originations and draws of existing lines were more than offset by paydowns.”

Borrowers who are furloughed can’t qualify for home equity loans and lines of credit unless they have a co-borrower who is currently working or if they have a co-signer. Federal Housing Administration rules require a person who has been out of work for six months to be employed again for at least six months before they can qualify for a loan. 

Kelly McPhee, Spokane-based vice president of communications and public relations of Walla Walla-based Banner Bank, says the bank hasn’t seen an increase in homeowners using their home equity loans or home equity lines of credit. 

“I would’ve thought that it would have gone up because we have a health crisis that’s turned, for some families, into a financial crisis,” McPhee says.

That certainly wasn’t the case during the Great Recession of 2008, she says, when it was common for homeowners to draw on home equity loans and lines of credit to stay afloat. 

Utilization rates of such funding sources at Banner Bank has declined two percentage points over the last two years, at 41% now from 43% in 2018, with steep declines occurring within the last six months, according to McPhee.

McPhee speculates that the decline could be attributed to those who have been approved for a HELOC, or home equity line or credit, but are simply being conservative with their funds. 

Another factor could be that interest rates are currently at all-time lows, McPhee says, so it makes as much sense, or even more, for a homeowner to refinance their loan for a lower rate versus drawing down lines of credit. Refinancing drives down the need for a home equity loan or a line of credit, McPhee contends, because it can roll a borrower’s existing loans into a single loan with a locked-in interest rate and payment amount.

HELOCs have variable interest rates, and the payment amount fluctuates based on the interest accrued, which usually makes them more costly in the long run if rates rise. 

McPhee explains, “If you have something that is on a variable rate, it’s wise to go for the locked in one, because eventually, those rates will go up.”

Banner is also seeing a slight drop in applications for new home equity lines of credit or home equity loans, McPhee says.

That is a good sign, she contends, as using such equity for basic living expenses is a sign of financial distress. 

“While it is a permissible way to use the funds, it’s not wise as far as the financial stability for the family or household,” she contends. 

That trend holds true to what is being seen on a national level.

Data from Attom show HELOC originations were down 11% in the first quarter of 2020 compared to a year earlier and were down 20% from the previous quarter. Residential HELOC mortgage originations decreased in 72.5% of metropolitan areas with a population greater than 200,000. 

One factor of the relatively stable number of applications could be increased unemployment payments and the Paycheck Protection Plan loans, which, while not a complete fix to one’s financial woes, likely had a role in easing financial distress, McPhee says.

From a financial perspective, measures taken at the national and state levels have helped to alleviate financial problems, she says. 

Adding, “While those certainly haven’t solved it, we suspect those resources are helping.” 

In 2019, Banner Bank originated about $1 billion in mortgage loans, McPhee adds, and is on pace to meet that goal in the third quarter of this year. 

Loan refinances have seen a significant jump at both Banner and across the market, McPhee says.

“You could talk to anyone who’s doing mortgage lending right now and they will tell you it is extremely busy,” she says. “It’s a breakneck pace in the mortgage industry right now and in mortgage financing.” 

Banner Bank mortgage banking revenues increased 39% to $14.1 million in the second quarter of the year compared to the previous quarter and was up 138% compared to the same time last year, according to Banner’s Q2 2020 financial report.

Attom data show refinances made up over half of home loans in the first quarter of the year, with more than 1 million residential refinance mortgages originated, up 87% from the first quarter of 2019. 

Refinances originated represented about $328.5 billion in total dollar volume, up 105% from a year earlier. 

However, McPhee cautions that borrowers should make sure that refinancing is the best option before pursuing that route as a money-saving option, as refinancing doesn’t always lead to smaller payments. 

She adds that the up-front fees should eventually pencil out to savings, but “if you can’t do that within a fairly short amount of time, it may not be worth refinancing.”