(As published by the National Association of Federally-Insured Credit Unions (NAFCU))
1. Home equity seems to be one of the few bright spots in the mortgage world this year: what’s driving its popularity, and what does this mean for credit unions?
Last year was a “perfect storm” for first mortgages. Coming off what was the best year ever in terms of mortgage originations, the Federal Reserve raised interest rates seven times in 2022 to combat inflation. This virtually eliminated refinances and created strong headwinds in terms of affordability for the purchase market. The result was the sharpest drop in first mortgages since 2014. Meanwhile, home equity products—which had in recent years taken a back seat to cash-out refinances—suddenly were back in vogue. In 3Q, ATTOM Data estimated that home equity originations rose by 48% year over year.
There are two primary drivers behind this shift: the first is home equity growth. After two years of double-digit home price appreciation, U.S. homeowners have more than $11 trillion in tappable equity. More than 85% of all outstanding first mortgages currently have coupons of 5% or less. As you’d expect, homeowners are reluctant to refinance their once-in-a-lifetime first mortgage interest rates. But they still want the ability to access their equity, which is why, for the foreseeable future, HELOCs and HELs will be the products of choice when consumers need money for big-ticket items like home renovation, college tuition, debt consolidation, etc.
Rick Sharga, the head of Market Intelligence at ATTOM Data, spoke at a recent webinar put on by Wolters Kluwer. One of the points he made is that the pivot to home equity plays right in the sweet spot for credit unions. His exact words were: “HELOCs are right out of central casting for credit unions.”
2. Why do credit unions have the upper hand when it comes to HELOCS?
Historically, HELOCs have been a core product for credit unions and a difficult product for mortgage banks. That’s because HELOCs are portfolio loans and are usually held on balance sheets, not sold into the secondary market. So, the advantage here goes to credit unions.
Also, credit unions know how to handle the draws and service HELOCs, something most nonbanks aren’t set up to do.
To some extent, credit unions were at a disadvantage during the refinance boom, when they had to compete with large national lenders who could afford Super Bowl-level advertising. Now that the market has shifted to home equity, credit unions are playing offense again: leveraging their relationships with members and aggressively marketing their ability to meet members’ financial needs via home equity lending.
3. Are there cost and risk issues that credit unions need to focus on?
Originating HELOCs isn’t as complicated or expensive as first mortgages, but there are settlement services costs, including, in some cases, full appraisals and title. And, of course, there are labor costs for underwriting and processing. In most cases, the lender, not the borrower, absorbs these costs, so credit unions need to be focused on origination costs and use as much automation as possible to protect their margins.
As with any loan, there is also risk. Credit unions need to be careful how they value equity, weed out fraudsters, and determine their position on the title. Make a mistake, and there is very little chance of recovery if a second lien goes bad.
As was the case with first mortgages, large national lenders and new fintech entrants are beginning to emphasize speed and the customer experience that credit unions use to attract HELOC customers. We’re starting to hear claims about HELOC approvals in minutes—and closings in a matter of days. To compete going forward, credit unions will need to offer fast decisions, convenient closings, digital document presentation, and eSigning capabilities.
Credit unions will also have to decide whether they want to originate first mortgages on one platform and with one set of document providers but use older core banking systems, or even a paper process, for HELOCs. Maintaining two systems is obviously less efficient and provides less visibility over different types of assets.
One final consideration is compliance. There aren’t standard forms for HELOCs. It’s basically up to each lender. Wolters Kluwer’s idsDoc can develop credit union-specific audits to make sure that internal rules are being followed.
4. In selecting a document/compliance system for home equity, what should a credit union consider?
The starting question should be: does the doc tech provider even have a HELOC solution? Wolters Kluwer has had one for more than 30 years.
Does the solution offer flexibility? Can it be easily customized for HELOC docs to meet a credit union’s business rules and needs? Does the vendor offer custom audits to assist with lending compliance? This takes on greater importance with HELOCs because, as we’ve discussed, there aren’t standard forms.
If the credit union intends to offer a competitive, modern experience, it will need to offer digital closings. Which leads to the question: does your company or your provider have eVaults that can accommodate these assets and provide transparency across all your real estate assets? Wolters Kluwer can help with its eVault platform, including its new OmniVault functionality, which is able to accommodate both first mortgage eNotes and digital HELOCs.