Lending for home purchases and refinancing was already slowing down in 2021, when cash-out loans to home owners spiked.
It has been obvious that the US housing market was “hot” in 2021. But new comprehensive data indicate that heat didn’t generate much progress in converting renters into owners — and thus likely did little to promote long-term wealth-building for the families who need it most.
The beneficiaries of that hot market were instead those who already own property — and were in a position to treat their homes like ATMs by converting equity to cash.
Home equity – the difference between the value of a home and the amount of mortgage debt on the home – is an important component of overall household wealth. Corelogic
Home equity, the value accrued in American homes, is both the primary way in which families build intergenerational wealth and is responsible for the largest share of the racial wealth divide.
In 2021 home lenders loaned $32.6 billion less to buy or refinance a home than they did in 2020. This 2021 slow down in the mortgage market was a prelude to the more widely recognized slowing down2022. But as home purchase and refinance lending slowed down or declined, extractive lending – the various ways a current homeowner might borrow against the equity they’ve already built – spiked in 2021. Lenders made $269.7 billion more in cash-out refinance and home equity loans than in the year prior.
The sum total of equity extracted by US homeowners in 2021 isn’t precisely known. But the evidence of a surge in extractive borrowing is clear. US lenders made a total of $925 billion in equity extracting loans last year, about 2 ½ times the amount they loaned in 2018.
2021 was the year that homes became ATMS again, as a tremendous increase in taking out home equity paired with a substantial decline in refinance lending.
There were a total of 26.2 million loan application records (LAR) reported in 2021, with 15.1 million resulting in an origination and another 2.7 million purchased from other sources. The vast majority of those originations – 13.3 million of them – were forward loans on owner-occupied, site built, 1-4 unit homes. There were 700,000 more cash-out refinance loans and 29,000 more home equity loans (including both home improvement, where the borrower intends to use the funds to repair or improve their property, or home equity loans which can be used for anything) in 2021 than in 2020, for a grand total of 3.6 million loans, about 1.6 million more than reported in 2018.
These figures come from the Home Mortgage Disclosure Act (HMDA) dataset published in June by the Consumer Finance Protection Bureau (CFPB). This yearly file includes approximately 88% of all mortgage application records made in the United States. NCRC uses this data in a variety of ways, including major reports, issue specific blogs, member, and our Fair Lending Tool.
2021 also saw an increase in the share of home loans of all types (home purchase, refinances, home improvement) going to non-white borrowers. Overall, Black applicants received 6.2% of all loans, while Hispanic applicants got 10.2%. Both of these were an increase of one percentage point from 2020. Loans to Asian borrowers remain nearly unchanged at 6.6%.
This evidence of a slightly more inclusive marketplace in terms of the number of loans issued is undercut, however, by the HMDA data on loan amounts. The share of loan dollars tells a different story. Black and Hispanic applicants received lower market shares while Asian borrowers accounted for 9.7% of all loan dollars across all loan purposes.
Specifically looking at home purchase loans in the new HMDA data, the number of loans to Asian, Black, and Hispanic borrowers all increased in 2021. Asian applicants saw the most gain, with 7.4% of home purchase originations. This was a 1.6 percentage point increase since 2020. Black borrowers increased from 7.4% to 8% and Hispanics went from 12.6% to 13.2%. Black and Hispanic borrowers received nearly the same share of all dollars lent in 2021 as they did in 2020. Meanwhile, Asian borrowers received 8.5% of home purchase loan dollars in 2020 and 10.8% in 2021.
Investor activity in home purchasing increased in 2021, rising from 16% on average in the years prior to the pandemic to 28% of all single family sales in 2021. In addition, sales of second/vacation homes also increased substantially over 2020. Despite valid concerns about the concentration of large corporate investors in Black and Hispanic communities it appears that most investors active in even the hottest housing markets are small companies or “mom and pop” investors. These investors are far more likely to “self fund”, using home equity or other savings to make down payments on a vacation or investment property while interest rates were at a generational low point.
Cash-Out Refinance, Home Equity and Home Improvement Lending
In 2021 the average interest rate was 2.99%. That figure differs based on the purpose of the loan. Home purchase loans averaged 3.05% across 4.5 million home purchase originations. The 5.1 million refinance loans issued in 2021 had average interest rates of 2.78%. Home equity and home improvement loans fell below 4% as well, making it cheaper than ever to extract equity from an existing home.
As interest rates continued their movement to historically low levels, homeowners overwhelmingly shifted from refinance lending to loans that allow for the extraction of equity for other purposes. These loans include cash-out refinance, home improvement and home equity loans. Home purchase loans increased modestly from 4.2 million in 2020 to 4.5 million in 2021, while regular refinance loans – where the loan pays off an existing mortgage with no equity extracted – fell by nearly one million.
Mortgage companies continued to extend their market dominance of home purchase lending, making over 65% of all home purchase loans in 2021. At the same time, the share originated by banks slipped to 28%, continuing the steady erosion of their position in the home purchase lending market.
Mortgage companies also led the charge in cash-out refinance lending, jumping from 55.5% to 63.4% of that market compared to 2020. The greatly expanded home equity and home improvement market, meanwhile, remained firmly controlled by banks and credit unions in 2021.
In August of 2022 Wells Fargo also announced they will scale back on the mortgages they purchase and originate as they realign their business model. As the largest bank lender in the country, and the second largest private buyer of mortgages from correspondent lenders, this will reshape the mortgage industry in 2023. The initial change in Wells Fargo’s business will be to sever their relationship with correspondent lenders, small mortgage companies that originate loans and sell them to the bank. These correspondent lenders will likely shift to selling to other outlets. But the exit of the second largest private buyer of loans is likely to mean consumers see additional costs. Perhaps of more concern is that, alone among large banks, Wells Fargo does a substantial amount of business in Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) mortgage loans. LMI, Black and Hispanic homebuyers rely heavily on these government insured loan programs to finance their purchases. As the 4th largest loan originator in the country, the retreat of Wells Fargo from mortgage lending will have a disproportionate impact on these communities.
Top Metros for Home Purchase Lending Originations
Home purchase originations increased by 22% nationally in 2021, while the average loan amount went up even faster – jumping 29% year-over-year to reach $351,000. Incomes didn’t go up much, however: The average income reported by borrowers was up just 7% from 2020 to 2021. Lower rates may have something to do with this since the same amount of debt doesn’t cost the borrower as much. In other words, if you borrow $240,000 at 4% you are going to pay $1,146 per month for the next 30 years. But at 3% you can borrow about $280,000 for the same monthly payment.
When rates remain persistently low homebuyers use that power to outbid one another. Coupled with a historically low supply of homes for sale, the result was spiraling home prices. As rates have risen in 2022 we have seen a slow down of the rabid housing market. While values continue to rise at this time we cannot be sure of the impact on borrowing trends this year.
Differences among top metro areas are also stark, with some communities showing far larger increases and decreases in loan amounts and numbers than the national average. The same goes for the income and down payments that borrowers are reporting when they buy a new home. Some cities report strong growth in the number of home purchase loans, loan amounts and down payments. In the case of Phoenix, Arizona, however, we see a relatively small amount of growth in home purchases – just 7% since 2018. Loan amounts have skyrocketed though, increasing by 41% to $373,978 in 2021. In addition, the amount that Phoenix homebuyers are putting down has increased by 56% to $100,758 during the same timeframe. This may suggest a pattern of gentrification and displacement, where higher-income buyers with more cash to put down on a new home are moving to the area. Phoenix also saw substantial increases in home equity extraction loans, discussed below.
Austin, Texas shows even more growth in loan amounts, up 45% since 2018 with 46% growth in down payments while just reporting a 20% increase in incomes. The average homebuyer’s income in Kansas City, Missouri actually fell by 36% over the same time period, while down payments increased by 33% and loan amounts went up 27%.
Top Metros For Cash Out and Home Equity Lending
Over $925 billion in loans were made to borrowers seeking to pull equity from their homes nationwide. This was an increase of almost $270 billion compared with 2020 – but some cities saw far more equity mining than others. In Los Angeles for example, 97,000 home purchase loan originations ranked seventh among metro areas. But LA-area lenders made 153,830 equity extraction loan originations in 2021, resulting in $72.6 billion in equity lending and placing LA firmly in the lead both in number of loans and total loan amount. By comparison, the 125,280 cash out and home equity loans made in the New York City metro area totaled just $42.3 billion. The substantial difference is due to higher loan amounts in LA, where lenders issued an average of $472,000 per borrower.
Yet, while the increase in lending when compared to 2018 in LA and NYC was substantial, at 148% and 102% respectively, Phoenix reported over $31 billion in lending, a 334% increase since 2018. Further down the list, Boise, Provo, and Austin all saw homeowners taking out more than four times as much cash as they did in 2018.
Top Lenders By Neighborhood and Borrower Characteristics
Rocket Mortgage, formerly Quicken Loans, is the largest originator of loans in the U.S. bar none. With over 1.1 million total originations in 2021, they made more than twice the loans of their nearest competitor. Mortgage companies make most of the loans originated each year, yet operate in most states without the regulatory supervision that requires banks to reinvest in communities equally.
Instead, as we show in our Fair Lending Tool, mortgage companies specialize in specific market segments in many communities. Some lenders, like Rocket Mortgage, usually made more refinance loans than home purchase loans. Others report high levels of low- and moderate-income (LMI) or Black, indigenous and people of color (BIPOC) applicants. That high number of LMI and BIPOC applicants does not necessarily translate to greater lending: Many mortgage companies show relatively few loans to LMI borrowers or in LMI communities.
Mortgage companies are the primary conduit for FHA and VA loans. Critical to all BIPOC communities, these government-insured programs are shunned by most banks and credit unions, leaving these borrowers with little choice but to seek out lenders that offer the kind of loans they need.
While the fresh 2021 HMDA data show some big changes to the overall home lending marketplace – from skyrocketing equity borrowing to major market share gains for mortgage companies at the expense of banks – they offer little evidence that the market is working well for those who don’t already own property. We see little change in lending for homes to first time homebuyers that broadens the home ownership market and could help address racial homeownership divide.
The mortgage market continues to underserve Black and Hispanic borrowers and people of color. As the cost of homes rise and borrowers need more incomes and larger down payments to enter the ownership class, underserved communities will find the transition to homeownership more difficult than ever. Many renters are still recovering from the COVID pandemic’s early economic impacts. As employment rises and incomes begin to grow this generation of homebuyers may find that equity-rich homeowners and landlords are demanding more rent and higher prices than they can afford.
The Community Reinvestment Act should be modernized to include mortgage companies. Successful implementation of mortgage company regulation in Massachusetts, New York, and Illinois has added a critical tool for consumer groups working to bring safe investments to redlined and marginalized communities and make sure that mortgage companies are not engaging in predatory lending, unfair practices, or redlining. In addition, regulators (DOJ, CFPB, and OCC) should vigorously enforce civil rights protections such as the Fair Housing Act (FHA) and the Equal Credit Opportunity Act (ECOA) that combat redlining.
Homeownership remains the only method of creating intergenerational wealth that has proven effective. The continued exclusion of many families prevents them from building wealth. But to keep that intergenerational wealth stable the homeowners of today need the renters of tomorrow to be able to afford their homes. Ignoring the persistent redlining and segregation that still define our communities is a poison pill at the heart of the American middle class.
Photo courtesy of Yuri-U - Adobe Stock, Paolese- Adobe Stock