Competition for HELOC business heats up as home equity grows

John Toohig stood at a podium as the moderator of a panel about home equity lines of credit (HELOCs) and asked an illustrative question of the audience of mortgage professionals.

“How many of you have a mortgage first lien, 30-year with a 4% coupon or lower?” A majority raised their hands.

“You are all the problem,” he said, garnering a ruckus of laughter.

His point was ostensibly about how homeowners locked into low mortgage rates are choking off home sales and mortgage origination volumes. But Toohig, who spoke Tuesday during the Mortgage Bankers Association (MBA)’s Secondary and Capital Market Conference in New York City, was also highlighting the opportunity for loan officers to originate more HELOCs and other second-lien mortgages.

“‘I’m in love with my mortgage, but I hate my house,’” Toohig, a managing director at Raymond James & Associates, said of a common homeowner attitude. “You take out the equity in the home you have and try to get it as close to the home you want. That’s what I think the HELOC is right now.”

HELOCs are often a secondary consideration among loan officers because they don’t make as much money on them as they do a first-lien mortgage.

But according to panelist Julian Grey of ICE Mortgage Technology, there’s $17.6 trillion in available equity among U.S. homeowners — and $11.5 trillion of it can be tapped while still allowing 20% of it to be retained.

“Those are staggering numbers,” Grey said. “What it means is that the product type is out there. HELOC rates have already fallen sharply since 2024. It looks like the Federal Reserve is going to continue to lower them, so that equity is just going to increase. There’s a lot of opportunity.”

The huge potential for HELOCs has many lenders dusting off their second-lien offerings. And judging by what panelist Allen Price of BSI Financial Services said, more lenders are recognizing the moment.

“The competition to chase that potential borrower is clear,” Price said. “You’re not only getting it from your traditional depositories and [investment banks], but now you have fintech firms that are offering consumer loans or shared-equity products. These fintech firms have the data to build models that are just amazing at predicting value and default.”

A common HELOC structure has a 10-year draw window and a 20-year amortization. This offers banks a duration play on their balance sheets to pair with a portfolio of low-rate, 30-year fixed mortgages.

But among securitized HELOCs, the draw window is being shortened to three years because rating agencies don’t like variability in the balances.

“The average life cycle on a HELOC is only about two and a half to three years,” said panelist Ken Flaherty of Curinos. “To offer a 10-year product that the borrower is likely going to fizzle out on and just keep that HELOC on your book for 10 years, that’s a deal killer for a lot of depositories. We’re seeing a lot of depositories shift to possibly shorten that initial draw period.”

With housing supply low and mortgage rates high, relatively speaking, the addressable market for first-lien mortgages has shrunk. The panelists believe that HELOCs can not only provide another revenue stream for lenders but also help generate leads for future loans.

“Lenders are looking at this as a retention tool or recapture tool to build a relationship with the borrower,” Flaherty said. “That increases those odds that they’re going to call you when that refi market comes back in a couple of years. It may mean doing a product you don’t love doing, but you’re building a strong relationship.”