By Fuquan Bilal
2018 could go down as ‘Year of the Home Equity Loan’.
With record amounts of US home equity and mortgage lenders looking for ways to spur growth, as refinance and purchase loans lag, we could see an intense amount of home equity lending this year.
Here’s what investors need to know…
42M US homeowners collectively have over $5.5T in equity. That’s without breaching the 80% LTV threshold. Many more are also in far more secure positions and are flush with more wealth in their homes than they have ever been.
This equity cushion is great for mortgage note investors. And it is only likely to grow, with predictions of housing prices rising even further in 2018.
Banks and lenders are expected to be heavily marketing home equity loans and HELOCs this year. Intense competition is anticipated between lenders vying for this business, which could bring even more attractive terms for borrowers.
Some borrowers may use this opportunity to pay off existing first or second mortgages with new home equity lines of credit at lower rates. This could be very profitable for some note holders, as it may free up more capital to be re-invested over the next 12 months.
At the same time, note investors holding first mortgages should be alert to any new finance activity which increases the total CLTV (Combined Loan To Value), recognizing the position this puts the borrower in, and how it may ultimately affect note values.
With home equity still rising, many homeowners are finding they are finally above water on their mortgages. This is good for note investors, who may see non-performing loans paid off in transactions, without having to grant short sales, or grant principal balance reductions.
Hundreds of billions of dollars of home equity are already being withdrawn from homes across the US. Much of that has been invested in home improvements. Again, this is very positive news, which could add more value to note investments and their underlying collateral. Others are using this cash for consumer spending and investing in stock and bitcoin, according to CNBC. Others are using it to invest in more real estate.
Given the current outlook for the US real estate market, it may be an especially good time to invest in more real estate with pent-up capital. Performance should be good for note investors, with some over-performance due to faster payoffs than expected and fewer administrative costs.
Find out more about investing in secured debt and real estate, go to NNG Capital Fund