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Bankrate: HELOC Losses Could Mean Gains for Reverse Mortgages

The diminishing availability of Home Equity Line of Credit (HELOC) loans due to lenders pulling back on such offerings makes finding those loans difficult, but alternative options — including a reverse mortgage — can help those who wish to access their home’s equity. This is according to a column published this week by Bankrate.

“Despite the vast amount of equity held by US homeowners relatively little of it has been converted into spendable cash,” the column reads. “The Urban Institute estimates that home equity loans represent just 4.4 percent of total US equity. Equifax reported that for the week of June 21 no more than 270 HELOCs were originated nationwide. A year earlier 27,620 HELOCs were originated during the same period.”

The problem is that due to the economic climate stemming from the COVID-19 coronavirus pandemic, many prominent lenders have pulled back their HELOC offerings, which makes them more difficult to access. On top of that, lenders are allowed to stop HELOC withdrawals even for those current on their payments according to federal guidelines, the column says.

“In normal times the combination of low interest rates and rising home values would elate mortgage lenders,” the column reads. “But these aren’t normal times. The COVID-19 economy is here and lenders are necessarily re-thinking the usual notions of risk.”

The equation now in front of lending institutions is one of profitability. Since HELOCs are traditionally second loans, and if home values stagnate or fall as the pandemic drags on, the first loan will need to be repaid completely before the HELOC lender sees any payment.

“For many lenders, the origination of second-loan HELOCs represents just too much risk in a changing economy for the amount of profit involved,” the column reads. “It’s just that simple.”

A reverse mortgage could represent a viable opportunity for people aged 62 and older seeking to tap into their home equity at this time, the column reads. This has been reflected in reality at least based on the inquiries being fielded by reverse mortgage loan officers shortly after the exits of both J.P. Morgan Chase and Wells Fargo from the HELOC market in April and May, respectively.

Some pre-existing HELOC customers are turning to a reverse mortgage since access to the line of credit could be put in jeopardy by current economic conditions, according to reverse mortgage loan officers who spoke with RMD in May.

“I just spoke to a financial advisor about this,” says Christine Jensen, a branch manager with Fairway Independent Mortgage Corp. in Arvada, Colo. at the time. “He’s concerned that his client could lose access to her line of credit when she needs it the most. He told me that it’s never been more urgent for his clients to have access to this product.”

Read the article at Bankrate.