Could anticipated rate cuts lead to more home equity lending?
ICE’s data suggests many mortgage holders are on sound financial footing following strong home price growth
Andy Walden
U.S. mortgage holders are sitting on record levels of home equity, casting a spotlight on their willingness to tap this wealth as expected rate cuts make equity utilization more affordable. Americans with mortgages held $17.2 trillion in home equity at the end of Q3 2024, or $11.2 trillion of ‘tappable equity’ - the amount homeowners can borrow against while maintaining a healthy 20% equity stake in their home - according to ICE’s mortgage, property and home price data.
On average, that’s ~$207,000 in tappable equity per mortgage holder. While equity growth has moderated along with home prices, Q3’s total represents a seasonally adjusted record high. From an equity leverage perspective, mortgage holders are in a robust position. Total outstanding mortgage debt in Q3 2024 represented just 45% of the underlying homes’ value, compared to an average of 58% over the last 30 years.
Homeowner equity on mortgaged residential properties
Source: ICE McDash +Property. Tappable equity is equity that can be withdrawn while still maintaining at least a 20% equity cushion in the property.
Just 0.42% of available tappable equity was withdrawn in Q3 2024, well below the 0.92% average extraction rate for the decade leading up to the Federal Reserve’s rate hikes that began in 2022. All in, homeowners are tapping equity at less than half the rate they have historically. That means nearly half a trillion dollars have gone untapped over the past 10 quarters – money that could have flowed back through the broader economy.
High interest rates have been a deterrent to equity extraction. Thirty-year mortgage rates hit the high 7% range while, according to ICE’s loan-level home equity database, the average introductory rate on second lien lines of credit (HELOCs) peaked earlier this year at over 9.5%. Since the Fed began its latest cycle of rate hikes in 2022, the monthly payment needed to withdraw $50,000 via a second lien HELOC more than doubled, from $167 in March 2022 to $413 in January this year.
The Fed’s recent pivot to policy loosening has begun to move the needle in the other direction, with additional expected cuts improving the borrowing calculus for more homeowners. Home equity offerings – with rates typically pegged to Prime – are more directly impacted by Fed cuts than 30-year mortgages, which are tied to 10-year Treasury yields and influenced by a broad array of factors.
Easing rates in the third quarter have already led to a modest increase in equity withdrawals, with U.S. mortgage holders tapping $48 billion of home equity during the period – the largest withdrawal volume since the Fed initiated their tightening cycle in 2022. This includes $27 billion withdrawn via second lien home equity products, and $21 billion withdrawn via cash-out refinance, with both forms of equity withdrawals hitting two-year highs in the third quarter.
While the outlook for rate cuts is softening following the U.S. Presidential election, the market still has ~75+ basis points of Fed cuts penciled in through the end of 2025. If that becomes reality and current spreads hold, second line HELOC rate offerings could fall into the mid 7% range by the end of next year – dropping the monthly payment on a $50,000 equity withdrawal back down near $300 per month. While still above the 20-year average of ~$210, it represents a roughly 25% reduction from recent highs. Given borrowers’ recent sensitivity to rates, these savings could well entice additional HELOC utilization. Lenders will seek to ensure they’re positioned for the shift, ready to originate and service HELOCs and other second lien products as effectively as they tend to first lien mortgages. It’ll be a welcome change for their customers, locked into historically low first lien rates but sitting on record stockpiles of equity and contemplating renovations, debt consolidation, or other large ticket expenses.
Monthly HELOC payment needed to borrow $50,000 of equity
Source: ICE McDash Home Equity. Second lien HELOC rate and payment outlook is based on the EconForecasting.com Fed funds rate forecast as of Nov. 6th holding the current Fed funds to Prime and Prime to second lien HELOC rate spreads constant over time.
Greater home equity utilization: implications for capital markets
If lenders see higher demand for loans and lines of credit, what are the implications for capital markets? Accurate knowledge of second lien existence and the ability to adjust borrower credit metrics are vital for mortgage investors. Accessing home equity also changes borrower risk profiles and warrants constant recalibration by holders of loans or mortgage-backed securities. Here, two critical ratios are Loan-to-Value (LTV) and Debt-to-Income (DTI). These determine underwriting eligibility at origination and are typically disclosed when a loan is sold or securitized. Investors looking to solve for Combined LTV and back-end DTI can utilize ICE McDash and ICE Property Data. These solutions offer data such as the identification of new liens, that can be used to update the borrower’s total mortgage debt outstanding. To incorporate the current market value of a property securing the loan, ICE’s Home Price Index has granularity for 20,000+ zip codes. When projecting prepayments and defaults, these can be key inputs as they alter assumptions for repayment ability and incentive to repay. Having a sharper view in these areas can be beneficial to behavioral modeling for mortgage investment purposes.