A few days after announcing tightened mortgage lending standards, JP Morgan Chase has decided to stop accepting new home equity line of credit (HELOC) loan applications beginning April 16.
“Due to the economic uncertainty created by COVID-19, we’re temporarily not accepting applications for new home equity lines of credit (HELOC),” read a brief prepared statement by Chase. “This will protect both you and the bank.”
Homeowners with pending applications filed before the cutoff will still be processed, and homeowners who have already accessed their home’s equity will continue to be able to do so. For homeowners who were counting on a HELOC to provide extra liquidity, Chase pointed them toward the company’s refinancing products.
“If you want to lower your monthly payment or access your home’s equity, our mortgage refinancing options may be able to help,” the statement concluded. “You can also find tools and resources to help you learn more about when to refinance, how the process works and what loan term might be right for you.”
In a statement to Housing Wire, Chase Home Lending Chief Marketing Officer Amy Bonitatibus expounded on homeowners’ options, saying they could apply for a cash-out refinance of their existing mortgage.
Like HELOC loans, cash-out refinancing allows homeowners to “turn” their home’s equity into cash; however, the methods of accessing cash are much different.
HELOCs enable homeowners to borrow all or a portion of their available equity. During the 10-year draw period, NerdWallet explained, homeowners will make interest-only payments, which switch to principal and interest payments once repayment officially begins.
Meanwhile, cash-out refinancing requires homeowners to apply for a new mortgage loan that’s more than what their home is currently worth. The difference is given back to homeowners, which can be used for a number of things, including renovations and debt pay off.
While a homeowner can access all of their home’s equity through a HELOC, cash-out refinancing has an access limit of 80 to 90 percent. Furthermore, homeowners will have to grapple with higher interest rates, closing costs, private mortgage insurance, and a higher risk of foreclosure if they can’t keep up with a more expensive mortgage note.
“Due to the coronavirus outbreak, refinancing may be a bit of a challenge,” Nerdwallet warned. “Lenders are dealing with high loan demand and staffing issues.”
In addition to high loan demand, Chase consumers may have a difficult time qualifying for a cash-out refinance since JP Morgan Chase tightened its lending standards to require a 700 credit score and 20 percent down payment.
“Due to the economic uncertainty, we are making temporary changes that will allow us to more closely focus on serving our existing customers,” Bonitatibus said of both Chase Home Loan changes.
There’s no word on when Chase will relax its standards, but the company expects a V-shaped recovery, which means homeowners may be able to access HELOCs sooner than later.
“If recoveries are equal to recessions in duration and magnitude, then the output lost in the downturn will be fully recouped during the rebound and asset markets might retrace as quickly as they slumped,” JP Morgan Head of Cross Asset Fundamental Strategy John Normand said in a report published on April 10. “Hence, the always hoped for and almost always delivered V-shaped profile.”
“If the recession inflicts longer-term damage to balance sheets or labor markets, then the recovery of lost income will be slower and so might be the rebound in corporate profits and asset prices. Hence, the dreaded U,” he added. “The COVID-19 recession might only be one or two months old, but a few signs of the always hoped for V-shaped recovery are starting to emerge.”