2024 Industry Resilience Brings 2025 Dynamic Solutions

Home equity lending has gotten a lot of attention in 2024, even though overall origination levels never quite reached the heights that some observers predicted they would. Now with the prospect of several Fed rate cuts ahead, will cash-out refinances outshine home equity in 2025? That was one of the major themes of the recent IMN MSR Forum in NYC last month. Covius Chief Business Officer Pete Pannes was at the conference and moderated a blue-ribbon panel that considered this question. We recently sat down with Pete to get his take on the forum and what the participants’ outlook for home equity in 2025 looked like.

Q: Pete, why don’t you start by telling us about your panel?
Pete Pannes: The panel discussion focused on HELOCs, closed-end seconds (CES) and new home equity alternatives, like home equity investments (HEIs), and featured panelists from BSI, Onity (formerly PHH), Dovenmuehele Mortgage, Cornerstone Servicing and Home.LLC. To set the stage for our discussion, I shared some industry stats that capture both the size of the home equity market and recent market dynamics. Some of the highlights included

In Q3 2024, U.S. homeowners had $17T in equity, $11.2T of which was “tappable.” At the household level, this translated into $319K worth of equity for the average homeowner, $207K of which was tappable.

Unlike past home equity booms, consumers haven’t been tempted to turn their homes into ATMs. Although equity extraction was up in Q3, the total equity withdrawn, via home equity products and cash out refinances, amounted to less than ½ of 1% of the total tappable equity. In fact, withdrawals have been running at only half the 10-year average. Second liens were 26% below that average and cash-out refis were down by 69%.

Q: What’s surprising in the home equity market?
Pete Pannes: I don’t think anyone was surprised about the less-than-robust performance on the origination side. We’ve seen similar reports throughout the year. For example, the Mortgage Bankers Association (MBA) reported that home equity originations were relatively flat year-over-year. However, despite the relatively low level of market penetration overall, the panelists were bullish on home equity as a product.
Historically, home equity has been a portfolio product, and not one that has lent itself to securitization and sub-servicing, but that is beginning to change. Some large non-banks have begun to embrace more traditional home equity products, particularly CES, which are easier to securitize and for which the servicing is very similar to first mortgages.

From an industry perspective, the upbeat news has come from the securitization side of the business. Through Q3, CES securitization was up by 350% year-over-year; HELOC securitizations were up 10% year-over-year, and HEIs were up 165%, though the dollar amounts were still low. Toby Wells, CEO of Cornerstone, who is both an investor and a servicer, summed it up this way: “There’s a huge appetite with investors today for home equity products, whether that’s a CES, a HELOC or even an HEI product…So [home equity] is going to be a huge opportunity, especially for servicers and lenders in that space, going into the first couple quarters of 2025.”

Nik Shah, CEO of Home.LLC, spoke to some of the consumer trends that he believed will eventually drive more consumer usage. These include higher household debt, particularly high interest credit card balances and the locked-in effect of extremely low first mortgage rates.