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M R EP O RT | 35 O R I G I NAT I O N S E R V I C I N G DATA G O V E R N M E N T S E C O N DA R Y M A R K E T THE LATEST ORIGINATION Addressing Concerns About Home-Equity Loans Despite record amounts of equity, certain types of home equity borrowing in 2020 dropped drastically. W ith home prices accelerating as they are, homeowners today are sitting on a collective $22.7 trillion in equity, the highest amount since analysts began collecting such data in 1945. That is according to a LendingTree study that examines one reason why borrowers hesitate to request home equity loans—they fear their credit will take a hit. "Many homeowners aren't rushing to tap their equity," wrote Tendayi Kapfidze, LendingTree's Chief Economist and VP. "In fact, certain types of home equity borrowing in 2020 hit their lowest level in more than 16 years." He says there are multiple reasons for this (including stricter lending guidelines and a fear of over-leveraging). However, he adds, "borrowers need not be afraid that tapping their home equity could hurt their credit scores, at least not in the long term," a statement he bases on data collected from 1,500 borrowers across 40 metropolitan areas who applied for a second mortgage. "Although most borrowers do see a decline in their credit score after taking out a home equity loan, the decline tends to be rela- tively small and their credit score usually recovers in less than a year's time," he said. Here are some of the study's key findings: • Borrowers in all 40 of the met- ros analyzed in LendingTree's study saw an average decline of 17.5 points in their credit score in the months following a home equity loan. • In the 40 metros featured in LendingTree's study, borrowers had an average 727 credit score before taking out a home equity loan. In general, average credit scores were high enough that a drop of 10 to 20 points wasn't likely to have a major impact on cost or accessibility to credit. • Credit scores took an average 104 days, or about three and a half months after closing on a home equity loan, to reach their lowest point. Kansas City homeowners saw their credit scores reach their lowest points the fastest with an average time of 63.5 days. The longest time in decline was for homeowners in Portland, Oregon, at 154.5 days. On average, according to the study, scores tended to fully recover to their pre-loan average in less than a year. The complete cycle to return the credit score to its former posi- tion before the home equity loan takes an average of about 201 days. Because a home equity loan likely will negatively impact a borrower's credit in the short term, Kapfidze offers a few recommen- dations for homeowners anxious to bounce back from that decline faster. It is best if borrowers refrain from applying for further credit while recovering from the home- equity loan hit, he said. "If you continue to apply for new forms of credit right after tak- ing out a home equity loan, then your credit score may not only fall further, but also take longer to rebound," he said. "As a result, the fewer new credit applications you submit, the better off your score is likely to be." He also suggests using as little credit as necessary during this period, paying every bill on time, and looking into debt relief pro- grams should that be a problem. New Home Purchase Apps Fall 23.8% YOY in June June home sales suffered for the third straight month due to a rise in regulatory costs, high- priced materials, and a lack of labor. Y ear over year, the Mortgage Bankers Association's (MBA) Builder Application Survey (BAS) for June 2021 shows mortgage applications for new home purchases decreased 23.8% compared to June 2020. Note that last June, much of the country was under stay-in-place mandates due to the pandemic. Compared to May 2021, the MBA found that purchase applications decreased by 3%. MBA estimates that new single- family home sales were running at a seasonally-adjusted annual rate of 704,000 units in June 2021, based on data from the BAS. The new home sales estimate is derived using mortgage app information from the BAS, as well as assumptions regarding market coverage and other factors. "Homebuilders are encoun- tering stronger headwinds of late, as severe price increases for key building materials, ris- ing regulatory costs, and labor shortages impact their ability to raise production. This has dampened new home sales and quickened home-price growth," said Joel Kan, MBA's Associate VP of Economic and Industry Forecasting. "Additionally, still-low levels of for-sale inventory are also pushing prices higher as competi- tion for available units remains high among prospective buyers. Applications for new home pur- chases fell for the third consecu- tive month, while the average loan amount surged to another record high at $392,370. In addition to price increases, we are also seeing fewer purchase transactions in the lower price tiers as more of these potential buyers are being priced out of the market, further exerting upward pressure on loan balances." The National Association of Home Builders (NAHB) recently estimated that changes in the price of softwood lumber prod- ucts that occurred between April 17, 2020, and July 8, 2021, added $29,833 to the price of an aver- age new single-family home, and $9,990 to the market value of an average new multifamily home. The seasonally adjusted esti- mate for mortgage applications for June is a decrease of 5% from May's pace of 741,000 units. On an unadjusted basis, MBA estimates that there were 66,000 new home sales in June 2021, a decrease of 2.9% from 68,000 new home sales in May. "Our estimate of new home sales in June dropped to its lowest annual pace since May 2020 at 704,000 units," Kan added. "The average pace of sales has remained strong at around 738,000 for the past three months, but it is still around 7% lower than the aver- age for 2020. Last year was the strongest year for new home sales in over a decade." By product type, conventional loans composed 74.4% of loan applications, FHA loans com- posed 14.0%, RHS/USDA loans composed 1.0%, and VA loans composed 10.6%. The average loan size of new homes increased from $384,323 in May to $392,370 in June.