I came across a report from CoreLogic the other day that home equity loan lending rose to its highest level since 2008.
Whenever anyone hears the date “2008,” they immediately think of the housing bubble of the early 2000s.
After all, this was when the housing market moved completely sideways after the mortgage market collapse.
It’s the year we’re all now using as a yardstick to determine whether we’ve returned to those unsustainable times, and it can only mean one thing: the coming crisis.
However, nuance is important here and I will tell you why the numbers from 2008 and the numbers from 2024 are not exactly the same.
First let’s add some context
CoreLogic Economist Archana Pradhan male Lending for home equity loans (not HELOCs) grew to the highest point since the first half of 2008 through the first two quarters of 2024.
During the first half of this year, mortgage lenders issued more than 333,000 home equity loans with a total value of about $23.6 billion.
For comparison’s sake, lenders originated $29.9 billion in home equity loans during the first half of 2008, before the housing market began to collapse.
It was the last big year for mortgage lending before the bottom fell out. For reference, total home equity lending was just $6.4 billion in 2009, and has barely exceeded $5 billion annually through 2021.
Part of the reason it fell off a cliff was because credit conditions froze overnight.
Banks and lenders went bankrupt, property values declined, unemployment rates increased, and there simply was no home equity to draw upon.
Once the housing market recovered, home equity lending remained weak because lenders did not participate as they had before.
In addition, volume was low because first mortgage rates were also very low.
Thanks to the Federal Reserve’s buying spree of mortgage-backed securities, known as quantitative easing, mortgage interest rates are at all-time lows.
The 30-year fixed yield fell to 2.65% in early 2021, according to Freddie Mac. This meant that there was no real reason to open a second mortgage.
You can turn to a cash-out refinance instead and secure a lot of really cheap money with a 30-year loan term.
That’s exactly what homeowners did, although once first mortgage rates jumped in early 2022, we saw the opposite effect.
So-called mortgage rate locking became a reality, as homeowners with mortgage rates ranging from less than 2% to 4% were discouraged from refinancing. Or sell for that matter.
This led to an increase in home equity lending as homeowners could borrow without interrupting their low first mortgage.
What about inflation since 2008?
Now let’s compare the two totals and take inflation into account. First, $29.9 billion is still much higher than $23.6 billion. It’s about 27% higher.
This is just a comparison of nominal numbers that are not adjusted for inflation. If we really want to compare apples to apples, we have to take into account the value of money over the past 16 years.
In fact, $24 billion today would be worth only about $16.7 billion in 2008, according to 2008 estimates. Consumer Price Index Inflation Calculator.
That would put the first-half 2024 total more on par with the years 2001-2004, before the mortgage industry completely faltered and threw rational underwriting out the door.
Simply put, while it may be the highest total since 2008, it’s not as high as it seems.
Furthermore, home ownership levels are now the highest they have ever been. So the amount being exploited is just a drop in the bucket in comparison.
In 2008, it was common to take out a second mortgage of up to 100% combined loan-to-value (CLTV).
This means that if home prices fall even slightly, the homeowner will fall into a negative equity position.
Today, the typical homeowner enjoys a very low loan-to-value (LTV) ratio thanks to wiser underwriting standards.
In general, most lenders will not exceed 80% CLTV, leaving in place a large equity cushion for borrowers who choose to leverage their equity today.
There has also been very little cash-out refinancing
Finally, we need to look at the mortgage market in general. As mentioned earlier, many homeowners struggle with locking in their mortgage rate.
They don’t touch their first mortgages. The only game in town if you want to cash in on your equity today is a second mortgage, such as a home equity loan or HELOC.
So it is natural that the volume will increase as lending on the first mortgage decreases. Think of it like a hammock.
With so few borrowers (practically speaking) opting out of their first mortgage, it’s only natural that we’ll see an increase in second mortgage lending.
Back in 2008, cash-out refinancing was huge, and home equity lending was rampant. Imagine if no one was doing refis at that time.
How high do you think equity lending would have been at that time? It’s scary to think about.
Now I’m not going to sit here and say that there is no more risk in the housing market as a result of increased home equity lending.
Naturally, there is greater risk when homeowners owe more and have higher monthly debt payments.
But comparing it to 2008 would be unfair for many of the reasons mentioned above.
Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My work experience in the early 2000s inspired me to start writing about mortgages 18 years ago to help potential (and current) homebuyers better navigate the home loan process. Follow me on Twitter for hot takes.
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