With rates near 52-week highs, home equity has become the only game in town for most borrowers
After a brief window for refinances earlier this year when rates dropped into the high-5s, rates have remained in the mid-6s for most of the rest of the first half of the year. This has led to limited opportunities for mortgage refinances but has opened the door to second-lien products.
The use of second-lien products continued to climb in the first half of the year. Most of that activity is being driven by borrowers who want to tap their equity without surrendering a low first mortgage rate. With rate relief unlikely in the near future, one mortgage executive continues to preach the importance of brokers having a wide range of second-lien product offerings.
Tom Davis (pictured top), chief sales officer at Deephaven Mortgage, said equity products are following the same path non-QM took four or five years ago, with many originators still not offering them and most borrowers who need them going somewhere else to get them done.
He cited stats saying 80% of Americans hold mortgage rates below 5% and the number of borrowers for whom refinancing makes financial sense has fallen from approximately 5.4 million to about 1.7 million as rates rose close to 60 basis points since February.
"The refinancing pool has collapsed," Davis told Mortgage Professional America. "And I was reading some data from ICE that said that second lien originations hit their highest first quarter pace in Q1, the highest pace in almost two decades. That's driven by borrowers unwilling to give up their first rates."
Why originators are still hesitant
He said much of his job today continues to be educating brokers on not only why they need second lien products, but why a wide variety of those products are so necessary.
"It still reminds me of non-QM like four or five years ago," he said. "Because originators, they're not used to selling equity or selling HELOC. So it's a lot of educating, both at the customer level and at the executive level."
Two misconceptions are holding brokers back, he said. The first is that equity loans carry small balances. Deephaven's average equity loan is over $200,000. The second is that HELOCs do not pay well.
"We pay up to 2 1/2 points on our HELOCs," he said. "We recently enhanced our HELOC to allow up to a $1 million HELOC, and 2.5% on a $1 million deal, that's $25,000. You do four of those, that's $100,000 a year."
He noted that homeowners are sitting on approximately $35 trillion in home equity. Many of those homeowners are deciding to stay put and fix up what they own, which is becoming more necessary as housing stock continues to age.
Davis said more than 50% of equity originations are renovation loans, with close to $600 billion in renovation projects expected in 2026. The market extends well beyond primary residence owners, with 19 million investment properties whose owners are not willing to surrender sub-3% notes to fund rehabs or new deals.
"People are staying in their homes longer," he said. "They can't afford to trade up. They don't want to give up that low rate. They're tapping into their equity."
Meeting borrower needs
For brokers who still aren’t offering second lien products, Davis said their customers are likely to just go elsewhere.
"If half of the refinance equity extraction in the market is being done through equity, then if you're not offering it, you're missing out," he said. "Your borrowers are going somewhere else to get those deals done."
Non-agency lending overall is expected to reach roughly $400 billion in 2026, with equity accounting for approximately $150 billion of that total, he said. That puts equity roughly on par with non-QM in terms of market size.
Borrowers have different needs, he said. Some want draws, some want fixed payments, and some need an interest-only feature to manage cash flow. Cash buyers represent approximately 30% of purchase transactions, and many leverage a HELOC for renovation work after closing.
"Everyone has a financial need," he said. "And having these products allows the borrower some flexibility to pick what best suits their needs."
Rates are unlikely to improve enough to bring the traditional refi market back before year-end, and Davis said brokers who are waiting for that to happen are making a mistake.
"I would not count on rates getting lower," he said. "The market has shifted, and originators need to embrace and adopt the shift and recognize it. Because if not, they're being left behind."
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This article is part of our Monthly Spotlight series, which in July focuses on reverse mortgages and refinances. Full coverage can be found here.
