The coming credit crunch will not affect our client’s ability to access credit. Will it affect yours? Exploring your client’s options sooner rather than later could be critical.
The regional banking crises is real, despite what narrative is being painted by the Fed and we all know it. As consumer and business deposits continue to leave reginal banks for security and better returns, reginal banks are seeing their lending abilities wither. On top of that, the macro-economic uncertainty has led them to tighten lending standards Mid-sized banks, the Fed said in reporting the survey results, seemed particularly stretched.
“Banks most frequently cited an expected deterioration in the credit quality of their loan portfolios and in customers’ collateral values, a reduction in risk tolerance, and concerns about bank funding costs, bank liquidity position, and deposit outflows as reasons for expecting to tighten lending standards over the rest of 2023,” the release said. “Mid-sized banks reported concerns about their liquidity positions, deposit outflows, and funding costs more frequently than the largest banks.” Most of the news concerning the credit crunch pertains to commercial lending. However, the consumer financing is next on the chopping block. The hot housing market that was induced by the covid-19 pandemic created billions of dollars in additional housing wealth for home owners across America. For instance, in Chattanooga TN the average home price has increased from 166,018 in 2018 to 275,056 in 2023. This is a whopping 64% increase! Nashville TN was just slightly behind with 56% over the same period of time. This unprecedented increase in home equity spurred homeowners to open or increase their existing home equity lines of credit or “HELOC” loans. Many large lenders are not offering HELOC loans due to current market conditions like Chase Bank who stopped taking HELOC applications as of April 17, 2020. However, small to regional credit unions and banks have continued offering these loans. As the credit crunch continues, it is almost certain that these smaller lending institutions will follow the lead of the MEGA banks. When this happens not only will new applications for HELOCs not be taken. Customers with exiting HELOC loans will lose access to their lines of credit because small and regional banks want to avoid the risk of people making a run on their home equity.
For individuals above the age of 62, there is a financing option that protects their ability to access their home equity regardless of economic conditions. Those individuals that have fully paid their home off or have a small mortgage balance can take advantage of the federally insured Home Equity Conversion also known as the “HECM” or “Reverse Mortgage” line of credit option. Unlike the traditional HELOC offered at banks, the HECM line of credit isn’t affected by the lending ability of a bank. Once the reverse mortgage line of credit is established, it is guaranteed to always be available to the borrower regardless of the circumstances of the lender or the economic environment at large. It is also guaranteed to grow for the client based upon the line of credit growth rate established in the loans initial terms. There are many other differences between the bank offered HELOC and the federally insured reverse mortgage. I only wanted to highlight the security that comes with the federally insured HECM in this blog post. The fact is, the reverse mortgage guarantees access to credit and there is no such guarantee that will be provided from a bank offering a traditional home equity line of credit. If an individual 62 or above wants a loan that offers guaranteed access to their home equity, a federally insured reverse mortgage should be explored.