When we talk about the state of mortgage lending, you don’t hear much about up-and-coming areas, but there are some rising sectors. To this end, this week, our spotlight is focused on the subject of home equity lending, and our expert on the subject is Rick Seehausen, CEO of Glendale, Colo.-based LenderLive Network Inc. Here’s what he had to say on this subject:
Q: What evidence do you see for a growing demand in home equity lending?
Rick Seehausen: It’s still early for a major come back in home equity lending, but the stage is set for it to happen. Black Knight’s latest numbers show home equity in 2013 was the strongest it has been since 2006 (though the overall levels are still way down). The growth, according to Black Knight, is being fueled by super-prime borrowers with credit scores in the high 700’s. By in large, these are the same borrowers who have taken advantage of the low first mortgage rates and are now locked into generationally low interest rates.
CoreLogic’s chief economist, Mark Fleming, recently made the same point a different way in his blog. He noted: “As borrowers regain their equity and interest rates continue to increase over the next few years, the incentive to stay in one’s existing home and finance home improvements will increase relative to purchasing a new home or refinancing with cash out. This is good news for the home improvement industry and mortgage lenders who focus on home equity lending, as both will benefit from the resurgent consumer demand.”
Having said that, not every lender is going to want to ramp up. Many of the largest money center banks have suffered from home equity losses, and a lot of the HELOCs, originated pre-crash, are just coming into their amortization stage, which could cause payment shock and additional losses.
But banks, community banks and credit unions will want to offer home equity products to serve their customers, protect relationships and replace some of the refinance mortgage volume that’s dwindling. The question is, can they offer these “no cost” products safely and profitably?
That’s the big question, given the new compliance rules for certain products, like fixed seconds, and the move to more expensive valuations options.
Q: Many homeowners were badly burned when home values plummeted following the 2008 crash. Do you believe that these experiences will scare people away from pursuing home equity loans?
Rick Seehausen: If you’re asking, do I think that homeowners have realized their homes aren’t ATM machines? The answer is, yes. But home values are increasing again and more and more borrowers are back in the black, in terms of equity. Also, prudent lenders are going to cap the amount of total CLTV that they will allow, probably around 90%. This will protect both lenders and borrowers in the future.
According to CoreLogic, more than half of all the mortgages in the country now have interest rates below 4.5% – that’s nearly 20 million homeowners. CoreLogic says these owners now have a “significant disincentive to either move or refinance in the future when interest rates are higher.”
So what are they going to do when they need more room, have to pay a $40,000 tuition bill or want to invest in other real estate? If they have the credit, the income and the equity, they’re going to consider tapping their home equity.
Q: How are home equity loans being used today versus pre-2008. And are the loan amounts the same as before or smaller?
Rick Seehausen: Probably the biggest difference today versus five years ago is that we aren’t seeing the origination of “piggy-back” first and second liens anywhere near the levels they were pre-2008. That was a popular, and in retrospect risky, solution to get around mortgage insurance. It definitely contributed to the mortgage crisis and the negative equity situation that we’ve all been dealing with these past five years.
The other major difference, I believe, will be the amount of total debt that banks will be willing to lend on a property. Today, the rule of thumb seems to be a 90% CLTV. It might go up a little for very good customers, but probably not to the 100%-120% LTVs of 2006-2007. And you can be sure that the collateral value will be verified.
But, aside from circumventing MI, the uses for home equity lending will most likely be the same: home improvement, debt consolidation, and dealing with lifecycle events, such as college, weddings, caring for parents, etc. Hopefully, there will be fewer boats and RVs, but who’s to say. Interestingly, we’re hearing about more sophisticated, higher income borrowers using home equity for short-term investments in other real estate (rentals and second homes) because the terms and rates may be more attractive than traditional second-home mortgages.
Q: What advice would you give to lenders that currently do not offer home equity loans, but might want to explore that product?
Rick Seehausen: Actually it is the same advice that we’d give to banks and lenders that do offer home equity loans, but haven’t been very active in this segment lately. Done right, these are safe, profitable assets that can build customer relationships. Moreover, home equity lending is one of the very few ways that you can offset the drop in your first mortgage volume.
But the rules have changed. For example, fixed seconds now fall under the Qualified Mortgage (QM) rule, and lenders are going to have to demonstrate that they have assessed ability to repay (ATR). This is a big difference and will add both expense and risk.
In addition to new underwriting processes, lenders need to make sure that they have the latest docs – for both origination and servicing. Our GuardianDocs unit has always been a leader in home equity. Today, our library of home equity docs covers home equity lending by both state and by type of institution, and there are lots of subtle differences that need to be observed. What a servicer can charge for a late payment or bounced check, for example, “penalties” varies both by jurisdiction and by what kind of license you have.
How to value home equity has also become a moving target. Five years ago, AVMs were the valuation tool of choice for HELOCs, but now there are a wide range of new products in the marketplace, and nearly as many opinions on their appropriateness.
Finally, you need to be efficient in your selection of title products, closing agents, etc., which is one of the reasons we’ve invested in our own title/settlement services company.
But some things haven’t changed: customers expect home equity lines and loans to be “no cost”, fast and relatively hassle free. This presents its own set of challenges to banks and lenders, particularly as the business begins to ramp up.
LenderLive Network is online at www.lenderlive.com.