Stubborn inflation and high interest rates continue to wreak havoc on the mortgage-origination market, but there is one asset class in the housing market that is arguably flourishing in these hard times – home equity.
Along with the solid base of home equity that now exists — a byproduct of the rapid home-price appreciation in recent years — there also has been an increase in demand by borrowers to tap that equity. A host of nonbanks and traditional depository lenders, such as banks and credit unions, as well as a growing number of fintech firms continue to ramp up efforts and product lines to meet that demand.
Among the nonbanks that either have or plan to introduce HELOC loan products are United Wholesale Mortgage, Rocket Mortgage, Guaranteed Rate, loanDepot and New Residential Investment Corp. (rebranded as Rithm Capital).
“Customers [lenders] are calling us asking is this a product that we should originate in the absence of cash-out refinance,” said John Toohig, managing director of whole loan trading at Raymond James. “They are saying, ‘Tell me what’s working, how can I stand a program up so I can capture some of this [home-equity] business.”
Toohig adds that lenders are telling him that their customers “don’t want to do a new 30-year fixed-rate mortgage at 6.25%, and we’d rather do a smaller-balance HELOC [home equity line of credit] instead to improve their property.”
Toohig said increasing the pressure on the mortgage-origination market are the Federal Reserve’s continuing benchmark rate bumps and other market signals that together point to interest rates heading higher. “I think in 2023, we’re going to see rates higher for longer,” Toohig concludes.
Through the market turmoil and volatility that marked much of 2022 — and is still with us today — home-equity lending expanded, however. Toohig said Raymond James finished the year with some $1.1 billion in HELOC trading volume, which he described as a “monster” year.
“Our previous best year for HELOCs was 2015, and that was about $320 million,” he added.
Closed fixed-rate second-lien [home-equity] loans have been up the least in terms of volume, Toohig said, with HELOCs leading the charge — along with unsecured personal loans used for home improvement. (A recent report from credit-rating firm TransUnion shows that unsecured personal loan balances hit a record $222 billion in the final quarter of 2022 — “driven by record-high originations in the first half of the year.”)
The most common HELOC Toohig is seeing, he said, is “a 10-year, IO [interest-only] 20-year amortization, with a lien secured in a second position.” Toohig added that the interest rate on a HELOC is normally variable, “usually prime, plus 1.5 to 2 points.” As of March 8, according to Commerce Bank, the prime rate was 7.75%.
Though “it’s not cheap money,” Toohig said it’s on “smaller balances of $50,000 to $100,000, not a $400,000 mortgage,” so that makes it more attractive to homeowners, especially those not interested in giving up their low 3% mortgages by refinancing to pull out equity at new rate that is twice as high today.
HELOCs rising
Toohig’s sense of the HELOC market from his perch as a loan trader matches the broader rising market numbers for the product. A recent report by the Federal Reserve Bank of New York shows that balances on HELOCs jumped by $14 billion in the fourth quarter of 2022, “the third consecutive quarterly increase and the largest increase seen in more than a decade.”
The Fed report shows HELOC balances nationwide stood at a total of $336 billion at yearend 2022. ATTOM, a real estate data provider, reports, however, that the “severe contraction across the lending industry in the fourth quarter of 2022 even hit HELOCs” in terms of origination volume. (The Fed report is a measure of loan balances, not originations.)
“The $60.1 billion fourth-quarter 2022 volume of HELOC loans was down 17% from $72.3 billion in the third quarter of 2022, but still up 27.4% from $47.2 billion in the fourth quarter of 2021,” a recent market assessment by ATTOM shows. “Despite the fourth-quarter decline [in originations], HELOCs still comprised 20.7% of all fourth-quarter 2022 loans — nearly five times the 4.6% level from the first quarter of 2021.”
Mirroring the surge in HELOC lending, one of the largest lenders in the country, Bank of America, reported in its fourth-quarter earnings release that the bank’s overall home-equity loan balance increased from about $4.9 billion in 2021 to $9.6 billion at yearend 2022. HELOCs were not broken out separately in that report.
HELOCs are revolving debt that, in the case of a 30-year HELOC, for example, involve a draw period of 10 years and a repayment period of 20 years. Unlike fixed-rate, lump-sum second-lien home-equity loans — HELOCs normally carry variable interest rates. HELOCs also are popular because the interest on the loans is tax deductible if the funds are used for approved home renovations.
“The direction of interest rates this year will dictate whether HELOC activity stays high as a portion of overall activity or households return to cash-out refinancing deals to help pay for big-ticket expenses,” said ATTOM CEO Rob Barber. “Broadly speaking, if HELOC rates rise faster than those other lending types, then HELOC activity will likely drop, especially if a notable gap develops between HELOC and refinance rates.
“…In the opposite scenario, with better terms on HELOCs, there is a better chance of those types of mortgages growing in number and dollar volume.”
With all the competing headwinds and tailwinds at work in the current market, Barber added that it’s an “especially hard moment to predict which way prices, or HELOC borrowing, will trend in 2023.”
“If there’s a recession and unemployment rises, it would not be a surprise to see HELOC activity do anything but drop,” he said. “But barring that, interest rates, prices and equity [levels] should be the key forces guiding credit-line borrowing.”
Shared-equity market
The Black Knight Mortgage Monitor reports that softening home prices resulted in tappable equity levels declining nationally by $2.3 trillion over the final two quarters of 2022. Still, tappable home equity nationwide exceeded $10 trillion at yearend 2022. Tappable equity is defined as the amount of available to borrow against while still maintaining a 20% equity stake.
“You have this really interesting dynamic … where you have nonbank lenders [among them Spring EQ and Figure] getting more active in the [home-equity lending] space, combined with an extreme rise in rates and, the third thing, is just the accumulation of total home equity in the U.S.,” said Peter Silberstein, chief capital officer, at Unlock Technologies, a fintech operating in the shared home-equity investment space. “[Most] homeowners are out of money [with low-rate mortgages], and the vast majority of them are sitting on enormous, historic amounts of home equity.
“In a positive way, this perfect storm that lends itself to more HELOC, second-lien debt and now home-equity agreements (HEAs).”
Unlock and an increasing number of other companies like it (such as Unison, Point, HomePace, and Hometap) are part of an emerging business segment in the home-equity space that serves borrowers who may not want or qualify for a traditional home-equity product like a HELOC. Instead, they offer homeowners a product called a shared-equity contract or agreement in which homeowners are provided cash upfront in return for a share of the equity in their homes.
At the end of the contract period (10 years in the case of Unlock) the homeowner must settle the terms of the contract either through a direct payment, refinancing or the sale of the home.
“One flavor [of a shared-equity agreement] is where the investor shares the appreciation and depreciation on the home, so at the end of the contract, the investor receives back their original dollars, plus a share of the appreciation or minus a share of the depreciation,” said Jim Riccitelli, CEO of Unlock. “Our contract is little different in that we share part of the entire home value at the end of the contract. It’s just different mechanics.
“… We serve the nonprime customer, those that have FICO [credit] scores that are lower than what you might see the HELOC originators doing. And we have more of an asset-based underwriting not focused on debt-to-income ratios.”
Silberstein explained that some homeowners are eligible to tap into their home equity using a debt instrument, such as a HELOC. “And then there’s a lot of them that aren’t,” he added,
“That’s where Unlock and the broader HEA base comes in,” he added, “and helps those homeowners tap into that home equity, so to me that remains an enormous tailwind on the consumer demand side.”
To date, Unlock has served more than 3,400 homeowners and originated more than $330 million in HEAs, according to Michael Micheletti, head of marketing and communications for Unlock, who added that the company does not release data on contract-default rates.
A publication reviewing the HEA market, published by The Kingsbridge Alternative Strategies Fund, states that the chances of a qualified homeowner defaulting on HEA obligations is low, at about 2%, because the contracts are extended to homeowners “with sufficient equity in their homes.” The report adds that among the most likely default scenarios for a shared-equity contract is when a homeowner “fails to pay senior loan obligations,” — in other words, failing to make payments on the primary mortgage note, leading to a foreclosure.
Another major player in the shared-equity investment (HEI) market is the real estate investment trust (REIT) Redwood Trust. Of Redwood’s total capital-investment outlays of $1.3 billion as of yearend 2022, some 13%, or about $171 million, was committed to the home-equity investment, or HEI, space. Since it began investing in the HEI business in 2019, Redwood has committed gross capital to the sector totaling $316 million, according to a recent filing with the U.S. Securities and Exchange Commission. The REIT currently has investments in two HEI originators — Point and Vesta Equity.
“We’re certainly pleased with the investments we’ve made to date and how they’ve performed,” said Dash Robinson, president of Redwood Trust. “We also think that the market is still in its very early stages [and] definitely ripe for innovation.
Toohig at Raymond James said we are in a cycle in the market where many homeowners are saying, “I love my mortgage, but I hate my house.”
“They’re saying, ‘I like my 3% mortgage, and I’m not going to list my house, but I’m just going to stay in my house, and I’m going to make it better,’” Toohig explained. “And if you subscribe to that particular conversation, then home equities and home-improvement loans are going to have a very good 2023, and higher rates mean that people are going to spruce up the home they’re in because they can’t find the home they want.”
Toohig added that despite his company’s “monster” of a year in 2022 trading HELOCs, he and others on his trading desk still wonder: If there had been more HELOC supply, could they have sold even more loans?
“One by one, we’re seeing more lenders stand up new [HELOC] programs,” Toohig said. “So, we do see more supply coming online, and I’m really curious to see how that goes in 2023.”
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Cooling inflation in February brings hope that Fed rate hikes are over
Consumer prices climbed at a slower pace in February, keeping alive the hope that the Federal Reserve may pause the federal funds rate hikes in its meeting next week following the Silicon Valley Bank and Signature Bank failures.
The Consumer Price Index (CPI) rose by 6% in February before seasonal adjustment compared to one year ago, lower than the 6.4% increase recorded in the 12 months ending in January, according to data released Tuesday by the Bureau of Labor Statistics (BLS).
The year-over-year increase can be attributed to large annual jumps in the indexes for transportation services (+10.2%), energy services (+13.3%), and food (+9.5%). Consumer prices fell in energy commodities (-1.4%), gasoline (-2%) and used cars and trucks (-13.6%).
Meanwhile, the CPI increased 0.4% on a monthly basis in February on a seasonally adjusted basis, after rising 0.5% in January. Transportation services jumped 1.1% and shelter had a 0.8% increase. But utility gas service declined by 8%, and fuel oil fell by 7.9%.
“Before this week’s bank failures and growing risks in the banking sector, the February inflation report would have meant that it was all but certain that the Federal Reserve would continue to raise rates,” Lisa Sturtevant, Bright MLS chief economist, said in a statement.
“The labor market is still proving to be surprisingly resilient in the face of eight rate hikes over the past year. But the recent failures of Silicon Valley Bank and Signature Bank have complicated the picture.”
Monetary policy observers had previously forecasted that the Fed would increase the federal funds rate by 50 basis point increase in the meeting scheduled for next week. However, it’s now growing the group of observers believe another hike could be counterproductive to manage the current turbulence.
A liquidity crisis hit American banks amid a deposit run. Silicon Valley Bank collapsed last week, the biggest bank failure since Washington Mutual in 2008. Signature Bank closed its doors on Sunday. And others are looking for ways to improve their liquidity to avoid a crisis.
“We now expect the FOMC to pause [the federal funds rate] at its March 21-22 meeting,” wrote a team of analysts at Goldman Sachs. “It will be hard to be completely confident in the near term that Sunday’s intervention will halt the pressure on smaller banks, who play a large macroeconomic role and could become considerably more conservative in their lending.”
Several other Fed observers told HousingWire on Monday that they expect a 25 bps hike next week.
In a joint statement on Sunday, the U.S. Department of Treasury, the Fed and the Federal Deposit Insurance Corporation announced the approval of interventions in Silicon Valley Bank and Signature Bank. They also approved depositors’ access to all their money and additional funding for banks.
The housing sector
According to Sturtevant, despite reports of rents and home prices falling across many markets, housing costs for homeowners, which account for more than 30% of the inflation index, remained higher than the overall figure in February.
“Housing costs are a key driver of the inflation figures, but they are also a lagging indicator. It typically takes six months for new rent data to be reflected in the CPI. The quirk in how housing cost data are collected contributes to overstating current inflation,” Sturtevant said.
Month over month, the shelter index was up 0.8%, with a 0.8% increase in rent and 2.3% for lodging away from home. Compared to a year ago, the shelter index was up 8.1% in February, with rents increasing 8.8%.
The current uncertainty brings an upside to the housing market: mortgage rates are in a downward trend. At Mortgage News Daily, the 30-year fixed-rate mortgage was 6.57% on Tuesday morning, down 19 basis points from the previous day.
“A pause in rate hikes and a flight to more secure investments will bring mortgage rates down, which could help prop up a subdued spring housing market,” Sturtevant said.
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Hispanic homeownership rate rose to 48.6% in 2022
Despite affordability challenges, the Hispanic homeownership rate reached 48.6% in 2022, the eighth consecutive year of growth.
Latinos added a net total of 349,000 homeowner households last year, which is one of the largest single year gains over the last decade, the National Association of Hispanic Real Estate Professionals (NAHREP) said in its 2022 state of Hispanic homeownership report on Tuesday.
Since 2014, when homeownership rates among Latinos began increasing following the Great Recession, 2.3 million net new Hispanic homeowner households had been added to the market, accounting for 24.4% of overall homeownership growth. Today, there are 9.2 million Hispanic homeowner households.
Latinos made up for 38.7% of all household formations last year. This is in contrast to the previous two years when an unexpected boom in non-Hispanic White household formations nearly doubled that of Latino households.
The shift in recent trends was expected, the report notes, as the relative youth and growing population of the Latino community would add to new household formations.
Latinos trend younger as homeowners. About 70.6% Latinos who purchased a home with a mortgage in 2021 were under the age of 45, compared to 63.9% of the general population, and 61.5% of non-Hispanic White buyers, according to data from the Home Mortgage Disclosure Act (HMDA).
About 33% of Latinos aged 45 and under have the credit characteristics to qualify for a mortgage. Among those who don’t already have a mortgage, the share of mortgage-ready Latinos increases to 39%, according to Freddie Mac.
Latinos have the largest near mortgage-ready population of any racial or ethnic group, the report noted.
Latinos tend to be concentrated in larger cities and coastal markets where home prices are high, the report said. The rapid rise in interest rates had a cooling effect on the overheated housing market, which in turn created new barriers to affordability. The rise in interest rates dramatically increased monthly mortgage payments, even in markets that experienced price reductions.
NAHREP noted ample opportunity markets in states such as Texas and midwestern markets that traditionally haven’t had large Latino populations.
Texas has consistently topped the list for most Latino net migration, best opportunity markets and producing the greatest number of new Latino homeowners. Between 2020 and 2022, Texas saw a net gain of nearly 150,000 Latino residents. McAllen, Brownsville, and El Paso, Texas also made up the top three opportunity markets for Latinos, based on the number of mortgage-ready Latinos and affordability.
“Despite market challenges, the future of homeownership growth will continue to rely on Latinos, given that they are young, growing in population, and rapidly forming new households,” according to NAHREP.
The increase in Special Purpose Credit Programs (SPCPs) could play a promising role in closing the non-Hispanic White and Latino homeownership gap, NAHREP said. SPCP mortgage types include refinance, purchase, construction, home equity lines of credit (HELOC) and down payment or closing cost assistance.
In 2023, both Fannie Mae and Freddie Mac will run scaled multi-metropolitan statistical area (MSA) pilot SPCPs with selected lenders in various cities and metro areas.
Numerous lenders are expected to bring their own SPCPs to market this year, opening the door for new programs that could address common underwriting issues, such as debt-to-income ratios and non-W2 incomes, two factors that disproportionately impact the Latino community, according to the report.
NAHREP conducted its annual Latino Buyers Survey from January 1 to February 13, 2023, to gauge Latino home buying trends across the country.
The survey was administered online and received 510 responses. NAHREP conducted in-depth interviews with all 25 top Latino real estate practitioners.
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Local Housing Markets: New York, Sarasota and Racine
Local housing markets is a HousingWire magazine feature spotlighting housing trends across the country.
New York City, New York
In many ways the spring of 2022 marked the full return of New York City and for a real estate agent like Johnson Tsai, a lead agent at REAL, this meant a massive up-tick in rental demand. “We are typically super busy from March through August and sometimes even into October,” Tsai said. “This seasonal trend came back last year and then we had even more people mov-ing back who had left at the onset of the COVID-19 pandemic. Things finally slowed down in November and I expect them to pick back up in the spring. It is still kind of a weird market, but it is going back to a little bit more normal.”
Tsai works with both homebuyers and tenants and while he says his business is typically split 50/50 between buyers and tenants, he has noticed a shift as mortgage rates have risen over the past six months. “Given the current market, my business is at least about 60% renters and the other 30% to 40% is buyers and sellers,” Tsai said. He also noted that he expects this ratio to continue in 2023 and the ratio of his business to potentially increase this spring.
Sarasota, Florida
On Florida’s Gulf Coast, Sarasota is the gateway to some of the state’s most famous beaches, including Lido Key and Siesta Key. The sugar-white sands of the local beaches have always been a draw for both tourists and prospective homebuyers, but according to lo-cal eXp Realty agent Sandy Williamson they have been enticing even more buyers than usual over the past few years. “A lot of people are moving here from other places,” she said. “They want to avoid state income tax and they don’t want to live in all that bad weather anymore.” Although Sarasota is on the coast, Williamson said the fact that it lies about 20 miles inland helps protect it from flood waters during hurricane season.
Williamson noted that the housing market slowed down in the fall, following typical seasonal trends. But, home prices were still up over 15% year over year, ac-cording to Redfin. As we head further into 2023, Williamson said she expects to see the usual increase in demand, but buyers are less optimistic than they were a year ago. “Buyers are a little scared because the majority of the people moving here are going to retire soon or are retired, so they may be living off investments in the stock market and that has been a bit touch and go lately, so I think buyers might be a bit more conservative in their budgets and look at getting a mortgage instead of paying cash for their home and having all their money tied up,” Williamson explained.
Seattle, Washington
The Pacific Northwest and Seattle, in particular, get a bad rap for being perpetually overcast and constantly rainy, but Amy Breach, a local Keller Williams agent and member of The Hill Team, says that the stereotype isn’t accurate. “We have mild temperatures — it’s not too extreme in any direction and yet we have the beauty of all four seasons,” Breach said.
“Summers just come to life here. You can feel the energy shift during the summer when the sun is out and the whole city is just shining.” In addition to great weather, Breach also noted the wide variety of environments within a few hours of the city, from beaches, to mountains, forests and deserts. The area’s natural beauty as well as abundance of job opportunities has been attracting homebuyers to Seattle for years, and while many migration studies have noted that people have left Seattle for more affordable metros, Breach said that she has not noticed a major change in demand.
“There are always flocks of buyers from out of state and out of county.” Although Breach says the market cooled off recently as interest rates rose to some of their highest levels in decades, she said it had not turned into a buyer’s market and didn’t expect it to switch in the near future. “The market is more of a balance market now,” she said. “We have more inventory than we have had in years, and we have almost enough buyers to support that inventory.”
Racine, Wisconsin
Marcia Ricchio, a RE/MAX Newport Elite agent, was surprised to find out that her market of Racine, Wisconsin, was one of the hottest housing markets in the country this past fall, according to Realtor. com. For Ricchio, the most challenging part of the housing market slowdown has been trying to bridge the gap between sellers, who are still expecting sky-high prices and multiple offer situations, and buyers, who are grappling with rising mortgage rates and mounting affordability issues.
Despite these challenges, Ricchio said homes that are move-in ready and priced right are still moving quickly and can still result in bidding wars. “We have to be a lot more diligent in pricing homes and getting sellers to understand that if they really want to sell, then my proposed price is a realistic number,” she said. “If they say yes and their home looks amazing, it is gone almost immediately.”
Located on the shores of Lake Michigan and between Milwaukee in the north and Chicago in the south, Racine has been attracting homebuyers looking for a bit more bang for their buck for years. “We have a downtown that is small but not too small with lots of activities and great restaurants, and then we also have the lake and some of the nicest beaches in the country — I just love this city,” Ricchio said.
Middlesex County, Connecticut
Including the Greater Hartford metropolitan area, Middlesex County is home to some of the largest cities in Connecticut, including Middletown, East Hartford and the state capital of Hartford. Since the onset of the COVID-19 pandemic, the Connecticut real estate market has witnessed somewhat of a renaissance after slowing to a near halt in the mid to late-2010s. “During the pandemic, a lot of New York residents wanted to get out of the city and just have more land for themselves and their families,” Michael Sklutovsky, a local eXp Realty agent, said.
“Connecticut is close enough to the city that they could still work in the city once things opened up, but it also had the benefit of being more rural. That combination brought a lot of more business to Connecticut.” Despite this upward momentum, market conditions in Connecticut have cooled in recent months as interest rates have gone up on top of typical seasonal trends. “February is usually my slowest month,” he said. “But I feel it will pick up in the summer like it usually does. Supply is still short, so I don’t expect prices to go down too much. It is still a good time to sell.”
This article was originally published in the February/March issue of HousingWire Magazine. Click here to read the full magazine.
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Here’s What Will Cause Mortgage Rates to Finally Fall
The housing market is stuck in a standoff. On one side, you have buyers, repeatedly beaten with high home prices, higher mortgage rates, and almost non-existent affordability. On the other, you have the sellers, who are sitting on low-interest-rate mortgages, unwilling to take a price lower than they want, waiting for rates to come back down, so the bidding wars begin all over again. This standoff has caused the housing market to come to a halt, with inventory at unbelievably low levels and no one willing to buy or sell.
But weren’t we supposed to be past this? When rates dropped earlier this year, the housing market looked like it was on a fast track to a real estate revival. But now, homebuyers, sellers, and investors don’t know where to turn. And that’s precisely why we brought on HousingWire Lead Analyst Logan Mohtashami, the one person who knows the real estate market better than the rest. Last time we had Logan on, he debunked the claim of a 2008-style housing crash repeat, and now, he’s on to forecast when the housing market could finally reach a healthy point again.
Logan knows why homeowners aren’t selling, why buyers aren’t bidding, and when mortgage rates will come back down. With some simple stats and data, Logan lays out almost exactly what would have to happen for us to enter a normal housing market and gives a rough timeline of when we can expect these changes to take place. And if you’re still on the “it’s gonna crash!” bandwagon, we’d suggest sticking around for Logan’s full explanation, as it may completely reverse what you thought was conceivable.
Click here to listen on Apple Podcasts.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
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Fannie Mae approves six vendors for controversial new valuation initiative
Fannie Mae has approved six firms to handle its new valuation initiative, which cuts traditional appraisers out of the process and potentially represents the biggest shift in the valuation space in years.
Fannie Mae last Wednesday updated its Selling Guide to include more options for property valuations, saying that the GSE is “moving away from implying that an appraisal is a default requirement.”
Those options include value acceptance – formerly known as appraisal waivers – as well as “value acceptance plus property data and hybrid appraisals.”
The participating firms, which will collect appraisal data and put it through Fannie Mae’s API, include the biggest name in the mortgage tech space: Solidifi, Class Valuation, Clear Capital, Mueller Services, Inc., Accurate Group and Black Knight‘s Collateral Analytics LLC.
For the new value acceptance plus property data option, third parties are authorized to do that collection at the property site, as long as lenders verify that they have a background check, have been “professionally trained” and are competent to do that collection. This data can only be submitted through Fannie Mae’s “Property Data API.”
In a statement Friday, Accurate Group said it has completed more than three million property data inspections and hybrid appraisals through its ValueNet suite of products.
Accurate Group is one of the two companies under the approved service providers for Fannie Mae’s Value Acceptance + Property Data that also offers title and closing solutions along with valuation services, said Paul Doman, president and CEO of Accurate Group.
“That’s a big statement – we’re a one-stop shop for lenders giving them a significant advantage over their competitors,” Doman remarked. “Our appraisal, property inspection, title and closing technologies are designed to plug into any digital platform.”
Among other initiatives the company is taking to digitize its real estate lending process is expanding its affiliate appraisal management platform AppraisalWorks to include title and closing services, Doman added.
Kenon Chen, executive vice president of strategy and growth at Clear Capital, told HousingWire last week that the potential for modernization in the industry is huge with Fannie’s announcement.
“This is a standardized data collection done at the property, which brings objective, transparent data into the whole process,” he said. “I think that not only drives this program, but paves the way for a better appraisal process when an appraisal is needed.”
Appraisers, as one would expect, are up in arms about Fannie Mae’s new initiative.
“I encourage all appraisers to take a very serious examination of their current business model,” wrote Washington-based appraiser Dave Towne on AppraisersBlog.com. “Shift NOW as much appraisal work as possible away from Fannie Mae. Because if the Fannie Mae trend continues, you won’t have any of that business in the future anyway.”
One appraiser of 23 years told HousingWire that there are real questions to be asked about the reliability of people hired to collect the data on behalf of the vendors, which could be real estate agents or others Fannie Mae deems “professionally trained.”
“I have found that there is a wide range of competence when it pertains to agents,” the appraiser said. “There are a lot of agents that are just in the business of selling with no real idea of what it is they are selling. Agents are coached to use sources such as county records to state property square footage. I am not confident that many will what to take on that task as it could lead to bigger issues for them down the road. What if they miss-measured a property that now is their listing?”
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Four states and Washington, D.C. record annual home equity declines
Despite the housing market cool down, homeowners with mortgages, which accounts for roughly 63% of all properties, gained $1 trillion in equity between the fourth quarter of 2021 and the fourth quarter of 2022, according to a report released Thursday by CoreLogic.
On average, U.S. homeowners with mortgages gained $14,300 in equity, a jump of 7.3%, from Q4 2021 to Q4 2022. While this is still a strong gain, it is down markedly from the average yearly equity increase of $63,100 recorded in the first quarter of 2022.
Homeowners in Florida recorded the highest level of annual equity growth at an average of $49,000 in Q4 2022. This trend looks to be continuing as prices were up 13.4% year over year in Florida in January.
Hawaii (+$37,100) and New Jersey (+$35,900) rounded out the top three states with the highest annual equity gains in the fourth quarter of 2022.
On the other end of the spectrum, Idaho (-$21,400), Washington (-$18,900), California (-$8,500), Utah (-$4,600) and Washington, D.C. (-$8,300), all posted year-over-year equity decreases in the fourth quarter of 2022.
“While equity gains contracted in late 2022 due to home price declines in some regions, U.S. homeowners on average still have about $270,000 in equity more than they had at the onset of the pandemic,” Selma Hepp, the chief economist at CoreLogic, said in a statement. “Even in Idaho, where borrowers were the most vulnerable to losses, the typical homeowner with a mortgage still has about $250,000 in remaining home equity.”
Year over year, the total number of homes in negative equity, meaning that the borrower owes more on their mortgage than they home is currently worth, was down 2% to 1.2 million homes or roughly 2.2% of all mortgage properties in the fourth quarter of 2022.
Looking ahead, based on the Q4 2022 book of mortgages, if home prices fall by 5%, 215,000 more properties would fall underwater.
“With 66,000 borrowers entering negative equity in the fourth quarter, the total number of underwater properties is now approaching levels seen at the end of 2021, which was the lowest since the Great Recession,” Hepp said. “The new hot spots for equity declines are largely markets that have seen the most significant home price deceleration, including Boise, Idaho; the San Francisco Bay Area; cities in Utah; Phoenix and Austin, Texas.”
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Is job growth slowing enough for the Fed?
Job growth continued in February, but at a slower pace, suggesting that the Federal Reserve interest rate hikes are having at least a mild impact on the labor market. However, the continued job market resilience could equate to even tighter monetary policy, spelling hard times ahead for the housing market.
Total nonfarm payroll employment rose last month by 311,000 jobs compared to January, according to data released Friday by the Bureau of Labor Statistics. By comparison, the job market gained 517,000 jobs month over month in January.
“There are signs there might be a shift in the labor market.” Lisa Sturtevant, Bright MLS’ chief economist, said in a statement. “Employers added fewer jobs in February, but overall job growth is still running strong. Before the pandemic, we were adding an average of only about 200,000 jobs each month.”
In addition to the slower month-over-month job growth, the unemployment rate also rose from 3.4% in January to 3.6% in February — with the overall number of unemployed persons increasing to 5.9 million.
Overall, the unemployment rate has shown little net movement since early 2022.
“The unemployment rate increased to 3.6 percent, partly driven by another increase in labor force participation, but remained well below historical averages,” Joel Kan, the Mortgage Bankers Association’s vice president and deputy chief economist, said in a statement. “We expect the unemployment rate to increase over the course of this year as the economy cools, reaching 4.8 percent at the end of the year.”
Slower wage growth is also good news for the Federal Reserve, which is still trying to fight inflation.
“Wage growth climbed by 0.2% in February, which was the slowest monthly increase since February 2022,” Odeta Kushi, the First American deputy chief economist, said in a statement. “In the topsy-turvy, upside-down economic world we are in, rising unemployment and falling wage growth are a good thing for the inflation fight.”
The construction sector added 24,000 jobs in February thanks to a large uptick in the specialty trade contractors segment of construction, which gained 13,400 jobs, and residential specialty trade contractors accounted for 11,200 of those jobs.
In addition, residential construction gained 1,200 jobs, while non-residential construction added 1,700 jobs during the month.
“Residential building construction employment is up 3% year over year, while non-residential picked up by approximately 5%. Residential building is up 12% compared with pre-pandemic levels, while non-residential building is up 1.2%,” Kushi said. “Breaking down month-over-month job growth in the construction industry, the fastest monthly growth came from residential specialty trade contractors, indicating ongoing strength for the remodeling market. While this month’s jobs report reflects a resilient construction labor market, the January JOLTS report indicated some signs of weakness. Construction job openings collapsed in January to the lowest level since October 2020.”
The real estate and rental and leasing services sector also experienced jobs growth in February, adding 9,400 jobs, with real estate adding 3,900 jobs and rental and leasing services gaining 5,400.
In February 2020, a combined 300,000 were employed in “real estate credit” and as mortgage and nonmortgage loan brokers. As of January 2023, there were roughly 349,400 people in those jobs, suggesting that the industry still has a large number of cuts to make in the coming months as the housing market slows to a crawl.
The lion’s share of the job growth in February came from gains in the leisure and hospitality sector (up 105,000 jobs), the retail trade sector (up 50,000 jobs), the government sectors (up 46,000 jobs), and the health care sector (up 44,000 jobs).
Despite the slower wage growth and rising unemployment rate, economists believe the Federal Reserve will continue to raise interest rates in the coming months.
“Fed Chair Powell communicated earlier this week that incoming data on the U.S. economy continues to show strength and that a higher level of interest rates, and potentially for a longer period of time, is likely needed to cool inflation,” Kan said. “The housing market typically benefits from strong employment conditions, but as monetary policy has tightened to combat inflation, bringing about higher rates and tighter financial conditions, homebuyers have pulled back over the past year. We expect the economy to go into a mild recession this year, and with that a cooling in home prices and lower mortgages rates, which should help affordability conditions and bring a gradual recovery in housing activity.”
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Home equity is the bright gem of the housing market
Stubborn inflation and high interest rates continue to wreak havoc on the mortgage-origination market, but there is one asset class in the housing market that is arguably flourishing in these hard times – home equity.
Along with the solid base of home equity that now exists — a byproduct of the rapid home-price appreciation in recent years — there also has been an increase in demand by borrowers to tap that equity. A host of nonbanks and traditional depository lenders, such as banks and credit unions, as well as a growing number of fintech firms continue to ramp up efforts and product lines to meet that demand.
Among the nonbanks that either have or plan to introduce HELOC loan products are United Wholesale Mortgage, Rocket Mortgage, Guaranteed Rate, loanDepot and New Residential Investment Corp. (rebranded as Rithm Capital).
“Customers [lenders] are calling us asking is this a product that we should originate in the absence of cash-out refinance,” said John Toohig, managing director of whole loan trading at Raymond James. “They are saying, ‘Tell me what’s working, how can I stand a program up so I can capture some of this [home-equity] business.”
Toohig adds that lenders are telling him that their customers “don’t want to do a new 30-year fixed-rate mortgage at 6.25%, and we’d rather do a smaller-balance HELOC [home equity line of credit] instead to improve their property.”
Toohig said increasing the pressure on the mortgage-origination market are the Federal Reserve’s continuing benchmark rate bumps and other market signals that together point to interest rates heading higher. “I think in 2023, we’re going to see rates higher for longer,” Toohig concludes.
Through the market turmoil and volatility that marked much of 2022 — and is still with us today — home-equity lending expanded, however. Toohig said Raymond James finished the year with some $1.1 billion in HELOC trading volume, which he described as a “monster” year.
“Our previous best year for HELOCs was 2015, and that was about $320 million,” he added.
Closed fixed-rate second-lien [home-equity] loans have been up the least in terms of volume, Toohig said, with HELOCs leading the charge — along with unsecured personal loans used for home improvement. (A recent report from credit-rating firm TransUnion shows that unsecured personal loan balances hit a record $222 billion in the final quarter of 2022 — “driven by record-high originations in the first half of the year.”)
The most common HELOC Toohig is seeing, he said, is “a 10-year, IO [interest-only] 20-year amortization, with a lien secured in a second position.” Toohig added that the interest rate on a HELOC is normally variable, “usually prime, plus 1.5 to 2 points.” As of March 8, according to Commerce Bank, the prime rate was 7.75%.
Though “it’s not cheap money,” Toohig said it’s on “smaller balances of $50,000 to $100,000, not a $400,000 mortgage,” so that makes it more attractive to homeowners, especially those not interested in giving up their low 3% mortgages by refinancing to pull out equity at new rate that is twice as high today.
HELOCs rising
Toohig’s sense of the HELOC market from his perch as a loan trader matches the broader rising market numbers for the product. A recent report by the Federal Reserve Bank of New York shows that balances on HELOCs jumped by $14 billion in the fourth quarter of 2022, “the third consecutive quarterly increase and the largest increase seen in more than a decade.”
The Fed report shows HELOC balances nationwide stood at a total of $336 billion at yearend 2022. ATTOM, a real estate data provider, reports, however, that the “severe contraction across the lending industry in the fourth quarter of 2022 even hit HELOCs” in terms of origination volume. (The Fed report is a measure of loan balances, not originations.)
“The $60.1 billion fourth-quarter 2022 volume of HELOC loans was down 17% from $72.3 billion in the third quarter of 2022, but still up 27.4% from $47.2 billion in the fourth quarter of 2021,” a recent market assessment by ATTOM shows. “Despite the fourth-quarter decline [in originations], HELOCs still comprised 20.7% of all fourth-quarter 2022 loans — nearly five times the 4.6% level from the first quarter of 2021.”
Mirroring the surge in HELOC lending, one of the largest lenders in the country, Bank of America, reported in its fourth-quarter earnings release that the bank’s overall home-equity loan balance increased from about $4.9 billion in 2021 to $9.6 billion at yearend 2022. HELOCs were not broken out separately in that report.
HELOCs are revolving debt that, in the case of a 30-year HELOC, for example, involve a draw period of 10 years and a repayment period of 20 years. Unlike fixed-rate, lump-sum second-lien home-equity loans — HELOCs normally carry variable interest rates. HELOCs also are popular because the interest on the loans is tax deductible if the funds are used for approved home renovations.
“The direction of interest rates this year will dictate whether HELOC activity stays high as a portion of overall activity or households return to cash-out refinancing deals to help pay for big-ticket expenses,” said ATTOM CEO Rob Barber. “Broadly speaking, if HELOC rates rise faster than those other lending types, then HELOC activity will likely drop, especially if a notable gap develops between HELOC and refinance rates.
“…In the opposite scenario, with better terms on HELOCs, there is a better chance of those types of mortgages growing in number and dollar volume.”
With all the competing headwinds and tailwinds at work in the current market, Barber added that it’s an “especially hard moment to predict which way prices, or HELOC borrowing, will trend in 2023.”
“If there’s a recession and unemployment rises, it would not be a surprise to see HELOC activity do anything but drop,” he said. “But barring that, interest rates, prices and equity [levels] should be the key forces guiding credit-line borrowing.”
Shared-equity market
The Black Knight Mortgage Monitor reports that softening home prices resulted in tappable equity levels declining nationally by $2.3 trillion over the final two quarters of 2022. Still, tappable home equity nationwide exceeded $10 trillion at yearend 2022. Tappable equity is defined as the amount of available to borrow against while still maintaining a 20% equity stake.
“You have this really interesting dynamic … where you have nonbank lenders [among them Spring EQ and Figure] getting more active in the [home-equity lending] space, combined with an extreme rise in rates and, the third thing, is just the accumulation of total home equity in the U.S.,” said Peter Silberstein, chief capital officer, at Unlock Technologies, a fintech operating in the shared home-equity investment space. “[Most] homeowners are out of money [with low-rate mortgages], and the vast majority of them are sitting on enormous, historic amounts of home equity.
“In a positive way, this perfect storm that lends itself to more HELOC, second-lien debt and now home-equity agreements (HEAs).”
Unlock and an increasing number of other companies like it (such as Unison, Point, HomePace, and Hometap) are part of an emerging business segment in the home-equity space that serves borrowers who may not want or qualify for a traditional home-equity product like a HELOC. Instead, they offer homeowners a product called a shared-equity contract or agreement in which homeowners are provided cash upfront in return for a share of the equity in their homes.
At the end of the contract period (10 years in the case of Unlock) the homeowner must settle the terms of the contract either through a direct payment, refinancing or the sale of the home.
“One flavor [of a shared-equity agreement] is where the investor shares the appreciation and depreciation on the home, so at the end of the contract, the investor receives back their original dollars, plus a share of the appreciation or minus a share of the depreciation,” said Jim Riccitelli, CEO of Unlock. “Our contract is little different in that we share part of the entire home value at the end of the contract. It’s just different mechanics.
“… We serve the nonprime customer, those that have FICO [credit] scores that are lower than what you might see the HELOC originators doing. And we have more of an asset-based underwriting not focused on debt-to-income ratios.”
Silberstein explained that some homeowners are eligible to tap into their home equity using a debt instrument, such as a HELOC. “And then there’s a lot of them that aren’t,” he added,
“That’s where Unlock and the broader HEA base comes in,” he added, “and helps those homeowners tap into that home equity, so to me that remains an enormous tailwind on the consumer demand side.”
To date, Unlock has served more than 3,400 homeowners and originated more than $330 million in HEAs, according to Michael Micheletti, head of marketing and communications for Unlock, who added that the company does not release data on contract-default rates.
A publication reviewing the HEA market, published by The Kingsbridge Alternative Strategies Fund, states that the chances of a qualified homeowner defaulting on HEA obligations is low, at about 2%, because the contracts are extended to homeowners “with sufficient equity in their homes.” The report adds that among the most likely default scenarios for a shared-equity contract is when a homeowner “fails to pay senior loan obligations,” — in other words, failing to make payments on the primary mortgage note, leading to a foreclosure.
Another major player in the shared-equity investment (HEI) market is the real estate investment trust (REIT) Redwood Trust. Of Redwood’s total capital-investment outlays of $1.3 billion as of yearend 2022, some 13%, or about $171 million, was committed to the home-equity investment, or HEI, space. Since it began investing in the HEI business in 2019, Redwood has committed gross capital to the sector totaling $316 million, according to a recent filing with the U.S. Securities and Exchange Commission. The REIT currently has investments in two HEI originators — Point and Vesta Equity.
“We’re certainly pleased with the investments we’ve made to date and how they’ve performed,” said Dash Robinson, president of Redwood Trust. “We also think that the market is still in its very early stages [and] definitely ripe for innovation.
Toohig at Raymond James said we are in a cycle in the market where many homeowners are saying, “I love my mortgage, but I hate my house.”
“They’re saying, ‘I like my 3% mortgage, and I’m not going to list my house, but I’m just going to stay in my house, and I’m going to make it better,’” Toohig explained. “And if you subscribe to that particular conversation, then home equities and home-improvement loans are going to have a very good 2023, and higher rates mean that people are going to spruce up the home they’re in because they can’t find the home they want.”
Toohig added that despite his company’s “monster” of a year in 2022 trading HELOCs, he and others on his trading desk still wonder: If there had been more HELOC supply, could they have sold even more loans?
“One by one, we’re seeing more lenders stand up new [HELOC] programs,” Toohig said. “So, we do see more supply coming online, and I’m really curious to see how that goes in 2023.”
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What Is Bonus Depreciation And How Does It Work?
Bonus depreciation lets you maximize your return and minimize your tax liabilities. With bonus depreciation, you can deduct a large portion of the cost of qualifying assets during the year they were placed in service.
Unfortunately, understanding bonus depreciation, how it works, and whether it’s right for your real estate investment strategy is no small feat—but that’s where we come in.
In this guide, we’ll walk you through everything you need to know about bonus depreciation.
What is Bonus Depreciation?
Your assets naturally depreciate over time due to use and general wear and tear. If you run a business, depreciation lets you write off a portion of your asset’s cost during its estimated “useful life” as long as:
In general depreciation, the portion you write off is equal to its estimated useful life. For example, let’s say you remodel the kitchen of your new rental property with cabinets that cost $7,000. Cabinets have a depreciation life cycle of seven years, meaning that you can claim $1,000 in depreciation for seven years.
Bonus depreciation accelerates this process. Instead of claiming $1,000 a year for seven years, you can get a lot more when you claim bonus depreciation. In 2022, you could claim 100% of your cabinet depreciation, meaning you’d get to write off all $7,000 immediately. Then, you can use the money saved via depreciation tax deductions on other things like reinvesting in your business.
Unfortunately, bonus depreciation is already getting phased out, so if you want to take advantage of massive tax write-offs, now’s the time.
How Bonus Depreciation Works
Let’s assume your kitchen cabinets actually cost $10,000. Here’s the phase-down schedule for the depreciation bonus:
Note: If you claimed 100% depreciation in 2022, that asset is no longer eligible for a tax deduction. You cannot claim a depreciation total greater than the asset’s price. Also, bonus depreciation is only good for the first year you use the asset. Taking the 80% bonus depreciation for an asset in 2023 is not eligible for the remaining 20% in 2024. You can only claim the asset’s standard depreciation percentage from the second year onward until you claim the full 100%.
Also, before reading on, check to see if your state allows for accelerated depreciation. Some of them don’t, including Florida, Hawaii, California, and New York.
When Did Bonus Depreciation Start, and Why Does It Exist?
Bonus depreciation first became a tax incentive when Congress passed the Job Creation and Worker Assistance Act of 2002. Back then, you could claim 50% depreciation in an asset’s first year of use. Its initial purpose was to encourage businesses to take the money saved via bonus depreciation and reinvest it into the economy after 9/11.
In 2017, Congress passed the Tax Cuts and Jobs Act (TCJA). One of TCJA’s fundamental changes is that assets eligible for bonus depreciation could be claimed in full as long as the property was acquired and placed in service between September 27, 2017 and January 1, 2023. In other words, if you bought and put those $10,000 kitchen cabinets to use in October 2016, you could write off $5,000. In October 2017, you could write off the total of $10,000.
However, TCJA also enacted the phase-out schedule displayed in the table above. Without another act of Congress, bonus depreciation will cease to exist in 2027.
Assets that Qualify for Bonus Depreciation
To qualify for bonus depreciation, assets generally have to have a recovery period or useful life of 20 years or less. Here are some of the most common assets eligible for bonus depreciation:
Residential rental properties with a cost segregation study
Cost segregation is another strategy that helps maximize your depreciation deduction and minimizes your overall tax burden. Cost segregation evaluates the depreciation of specific assets in your rental property, including flooring, cabinets, countertops, appliances, and lighting, to name a few. Given that this is incredibly relevant in the BiggerPockets community let’s dive a little deeper:
You can write off a ton of money in bonus depreciation via a cost segregation study. For example, let’s say you purchase a vacation property with an assessed building value of $275,000. Since residential properties have a useful life of 27.5 per year (which disqualifies them from bonus depreciation), you write off $10,000 in depreciation: $275,000 / 27.5 = $10,000
You also spend $40,000 on interior upgrades eligible for bonus depreciation, putting them all to use in 2023.
Let’s also assume you earn $40,000 in rental income that year and pay 25% in federal income tax.
Thanks to general depreciation, you save $2,500 in taxes. When you include a cost-segregation study, you save a lot more. Your cost-segregated assets eligible for bonus depreciation is $40,000, and in 2023, you can claim up to 80%.
In this scenario, your cost-segregated assets let you claim a $500 net operating loss, which you carry forward and offset future income.
Qualified improvement property
Qualified Improvement Property (QIP) includes any improvements made to interior portions of non-residential buildings after you’ve placed them in service.
QIP also applies to the interior improvements made to short-term rental properties, thanks to the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
Additional bonus depreciation qualifiers
Additional eligible assets include:
Assets that Don’t Qualify for Bonus Depreciation
Here are some of the main assets that don’t qualify:
How to Report Bonus Depreciation on Your Taxes
You can report bonus depreciation by filing IRS Form 4562, “Depreciation and Amortization.” As with other tax forms, you must file by the due date (including extensions) for the taxable year you claim bonus depreciation.
What’s the Difference Between Bonus Depreciation and Section 179 Expensing?
Bonus depreciation and Section 179 share much in common but have a few key differences.
First off, bonus depreciation lets you take a loss on your income, like in the cost-segregation example above. If you use Section 179 and take a loss, you must carry it forward until you have the income to absorb it. Otherwise, you can take the standard depreciation deduction.
Another key difference is that many states don’t allow for bonus depreciation. For example, if you’re a California resident, you can’t claim bonus depreciation, so you might want to consider using Section 179 instead. Different states have different rules for both tax deduction options.
Also, you must write off the total amount available to write off bonus depreciation. If you want to only claim 50% of your bonus depreciation for your 2022 tax year, you can’t. You have to claim the full 100%. With Section 179, you can deduct any amount you choose as long as it’s within the thresholds of that taxable year.
What Are the Pros and Cons of Bonus Depreciation?
At this point, you’re probably aware of some of the main pros and cons of bonus depreciation.
Pros
Cons
Should You Take Advantage of Bonus Depreciation?
Bonus depreciation can be a tremendous asset (pun intended), depending on your long-term plans. It can give you more cash on hand to reinvest in your business or additional properties, but keep in mind that it’s not “extra” money by any means. You’re simply maximizing your tax write-offs now in exchange for fewer-to-no depreciation in future years.
Typically, having extra cash on hand sooner is a good thing—as long as you have a plan for it.
If you’re wondering how best you can use the extra money you’ve received via bonus depreciation, check out the BiggerPockets Forums. Our community of real estate investors, agents, and other professionals can provide you with some insight.
Not sure how to maximize deductions for your real estate business? In The Book on Tax Strategies for the Savvy Real Estate Investor, CPAs Amanda Han and Matthew MacFarland share the practical information you need to not only do your taxes this year—but to also prepare an ongoing strategy that will make your next tax season that much easier.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
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FTC sues to stop ICE-Black Knight merger, says it would “drive up costs”
The Federal Trade Commission (FTC) on Thursday sued to block the proposed $13 billion merger between Intercontinental Exchange Inc. and rival mortgage software firm Black Knight.
The federal agency said the merger would give ICE and Black Knight a significant position in the market for loan origination software, which it could use to push customers to its other mortgage services and products instead of rivals’ offerings, the agency argued. It also claimed a merger would stifle innovation and reduce lenders’ choices for both origination and mortgage servicing.
The FTC voted 4-0 to file the complaint in the agency’s in-house court.
“For many Americans, buying a home is an important investment toward building financial security,” said Patty Brink, the acting deputy director of the FTC’s Bureau of Competition. “This deal would reduce competition in key areas of the mortgage process, ultimately raising costs for lenders and homebuyers. The FTC will intervene when illegal mergers risk harming competition in such critical markets.”
The move, which was widely expected, sets the specter for a legal challenge between Atlanta-based ICE and the federal government.
“ICE is fully confident in our position and look forward to presenting it in court,” the company said in a statement Thursday. “While that litigation plays out, the company is continuing its work toward closing the acquisition, which it expects to complete in the third or fourth quarter of this year.”
ICE and Black Knight this week announced that they had agreed to sell Empower, Black Knight’s LOS, to Canadian software company Constellation Software, though the deal is contingent on the merger going through. The two companies also amended their deal terms to reduce the valuation of Black Knight to $11.8 billion, about 11% lower than the valuation when the agreement was announced last year.
Empower commands about 10 to 15% market share, a distant second to ICE’s Encompass LOS, which is estimated to have about 40 to 45% market share.
Regarding that proposal to sell Empower, the FTC said it “does not address the anticompetitive effects in the market for PPE software and would not replace the intense competition between ICE and Black Knight in the LOS market.”
ICE is the owner of the New York Stock Exchange and has looked to diversify its business through mortgage.
“We are disappointed that the FTC has filed litigation to prevent ICE from closing our acquisition of Black Knight,” Tim Bowler, president of ICE Mortgage Technology, said in a statement. “The proposed acquisition can bring to life a true end-to-end solution for the mortgage industry, benefitting aspiring and current homeowners across the United States.”
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