HELOCs: The Elusive Borrowing Tool

Banks Reluctant to Originate HELOCs Again

Citing economic uncertainty, several large banks stopped originating new HELOCs at the onset of the pandemic. Those same banks are still sticking to these policies, even as the economy and the labor market improve. Additionally, the real estate market is booming and there is $7.3 trillion in home equity which homeowners have not tapped.

Wells Fargo, (WFC) which suspended new HELOCs last April, doesn’t know when it will lift the rule. JPMorgan Chase (JPM) also has not said when it will begin accepting applications for new home equity lines of credit again.

Bank of America Bucks the Trend

Bank of America (BAC) is among the handful of large financial institutions which continued to extend home equity lines of credit during the pandemic. The bank instituted more stringent underwriting standards to protect against the increased risk of default and only worked with existing clients. As the economy began to improve in the first quarter, Bank of America relaxed those standards. It is now seeing pent-up demand for HELOCs.

The other big banks are expected to restart HELOC originations, but only in instances when the bank holds the first mortgage on the property. This way, if a customer defaults there is less risk of loss to the bank.

Are HELOCs Worth it for Banks?

It is not completely clear why banks have been reluctant to reenter the HELOC market. Initially, banks were trying to protect themselves against defaulting homeowners. Now, it may be an operational issue.

During the pandemic, big banks saw huge demand for mortgage refinances as rates dropped below 3%. As a result, staff members who used to work on home-equity lines of credit started working on mortgage refinances to meet the surging demand. Capital reserve and liquidity requirements associated with HELOCs are also prompting banks to focus on other lending products.

As the economy continues to rebound, analysts in the home-focused debt space will be watching to see what long term impact the pandemic had on these special lines of credit.

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