The housing market's hot ticket right now? Home-equity financing from credit unions.

By Joy Wiltermuth

Credit unions ramped up second liens by $26 billion in the first quarter from a year before, says BofA Global

Credit unions have become a go-to source of financing for homeowners looking to pull equity out of their properties.

Second-lien mortgages at credit unions in the U.S. increased by $26 billion in the first quarter of 2024 compared to a year before, while banks ramped up their second-lien holdings by only $5 billion over the same stretch, according to BofA Global.

Home-equity lines of credit, or helocs, and second liens represent a small but growing source of funding for homeowners reeling from higher borrowing costs since 2022, when the Federal Reserve began to aggressively hike interest rates.

Helocs and second liens currently represent only about a $512 billion slice of the U.S. housing-finance market, according to BofA. Of the second-lien total, credit unions were sitting on about $136 billion in the first quarter, while banks were holding another $32 billion.

The second-lien market likely has further room to grow if more homeowners look to pull out cash from the estimated $33 trillion pile of home equity built up during the pandemic. Supply shortages of new homes have led property prices to double in less than a decade, and high mortgage rates make it more expensive to cash out by refinancing an old mortgage.

To that end, the Federal Housing Finance Agency, a housing regulator, recently granted Freddie Mac (FMCC) approval for a limited pilot program to buy up to $2.5 billion of second liens.

Read: Freddie Mac wants a new role financing homeowners sitting on equity. One banking group isn't happy.

Freddie's second-lien proposal has received some pushback from competing lenders and certain parts of the mortgage industry. While charging rates of about 9% to 10%, the appeal of second liens for some borrowers is that they won't need to forfeit low-rate senior mortgages, many of which carry a fixed, sub-4% coupon for 30 years.

Freddie and Fannie Mae (FNMA) also could provide some standardization in the industry, given their massive footprints in U.S. housing finance.

Navy Federal Credit Union dominates the market for second liens among credit unions with $5 billion in holdings, followed by more than $2 billion in exposures for the likes of Boeing Employees Credit Union, Mountain America Federal Credit Union and the Pentagon Federal Credit Union, according to BofA Global.

Many credit unions expressed favorable views of the Freddie proposal on second liens in comment letters to regulators, saying it would provide an outlet currently unavailable to them, according to a May 31 research report from BofA Global.

-Joy Wiltermuth

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06-24-24 1620ET

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