JPMorgan Chase has temporarily stopped offering home equity lines of credit due to the massive increase in U.S. unemployment and projections that U.S. home prices could go down amid the coronavirus pandemic, causing a tsunami of defaults.
The largest bank in the U.S. and sixth-largest in the world, JP Morgan has $3.1 trillion in assets. It announced the pause in home equity lines of credit (HELOC) days after raising its lending standards for mortgage purchases. Even with historically low interest rates, most mortgage purchase borrowers now have to come up with at least a 20-percent downpayment and have a 700 FICO score.
Customers at the New York bank can still tap into their home’s equity through cash-out refinancing of their existing mortgage, said Amy Bonitatibus, chief marketing officer at Chase Home Lending.
Cash-out refinancing has become more popular among JP Morgan customers. In 2019, the bank did twice as many cash-out refinacing as HELOCs, originating about 33,000 home equity lines of credit and twice as many cash-out refinances, Bonitatibus said.
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A cash-out refinance is refinancing of an existing mortgage loan, where the new mortgage loan is for a larger amount than the existing mortgage loan, and the borrower gets the difference between the two in a lump sum.
With a home equity line of credit, you’re also borrowing against your home equity but instead of a lump sum, a HELOC is more like a credit card. You have a certain amount of money available to borrow and pay back, but you can take what you need when you need it. You pay interest only on the amount you draw. HELOCs often start easy with a lower interest rate than home equity loans but the rate is adjustable or variable. It rises or falls according to the movements of a benchmark. That means your monthly payment can rise or fall too.
Spokespeople for Wells Fargo and Bank of America said that those banks are still offering HELOCs, American Banker reported on Thursday.
JPMorgan Chairman and CEO Jamie Dimon warned last week that the bank is preparing for a worst-case scenario where its credit costs could exceed $45 billion if the economy stays closed longer than expected. Home values could go down by 10 percent and the unemployment rate could go as high as 20 percent, according to JPMorgan projections.
During the Great Recession, home prices fell about 35 percent between 2006 and 2009, according to the S&P CoreLogic Case-Shiller home price index.
About 22 million Americans — 15 percent of the U.S. workforce, have applied for unemployment insurance in recent weeks as a result of coronavirus.
The $2 trillion CARES Act (Coronavirus Aid, Relief, and Economic Security) passed by Congress in late March mandates that all borrowers with government-backed mortgages be allowed to delay mortgage payments for 180 days, and get another 180-day extension.
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The forbearance allows a borrower to defer payments for up to a year on loans backed by Fannie Mae, Freddie Mac and the FHA (Federal Housing Administration). The deferred payments potentially could be added to the end of a loan and repaid when a borrower refinances or sells.
Banks have been bombarded with forbearance requests from homeowners as a result of economic damage from COVID-19. Mortgage lenders are trying to assess how many homeowners will ask for forbearance.
JPMorgan set aside nearly $8.3 billion for credit losses for the first quarter, five-to-six times more than the $1.5 billion provisions in Q1 2019 last year and up from $1.42 billion in Q4 of 2019.