(As originally published in theMReport.com)
The ability to hold assets in portfolio is a significant advantage that banks and credit unions have always had over independent mortgage companies and one of the main reasons that they have been able to capture the lead in home equity lending. Recently, this advantage has also become a concern for some mid-size and smaller institutions that are trying to increase liquidity and/or decrease asset-concentration risk.
As a result, investor and secondary market take-outs for HELOCS and non-agency assets, originally designed to help non-banks with liquidity, are now gaining favor with some depository institutions that are trying to meet customer and member demand without holding assets on their balance sheets.
Ideally, as these institutions rethink their lending strategies to include secondary market executions, they will also consider modernizing the way they manufacture assets. For example, adding enhancements like digital closing, eNotes, and digital HELOCs, that will better support their new originate-to-sell or securitize activities.
Rethinking the home equity opportunity
As expected, 2023 continues to be a banner year for home equity lending. With millions of homeowners sitting on approximately $18.1 trillion in tappable equity and unwilling to trade in their 3%-4% first mortgages to access it, HELOCs and HELs are the right products for the times.
Currently, all the top 10 HELOC originators are banks or credit unions, and as you go farther down that list, credit unions are surprisingly well represented. Again, this is hardly surprising given that home equity products have historically been portfolio products.
At mid-year, ATTOM Data estimated that more than one million HELOCs had already been originated, nearly as many units as the 1.2 million originated in all of 2022.However, following the failure of three mid-tier banks this spring, the banking community has been more cautious about balance-sheet lending in general, including home equity originations.
The May data report from the Federal Reserve showed U.S. commercial banks reducing their HELOC holdings slightly and noted that this was the fourth consecutive month that these holdings had declined.
Warning signs for credit unions?
Meanwhile, the credit union industry’s chief regulator, the National Credit Union Administration (NCUA), is recommending that credit unions take a more cautious approach to home equity lending. NCUA Chairman Todd Harper recently summed up his concerns in an industry newsletter.
“Within the credit union system, we have experienced continued growth in lending, along with increases in assets and insured shares. This is good news,” Harper said. “But warning signs are also flashing on the horizon, like the rise in home equity lines of credit, increases in credit card balances and higher delinquency rates.”
NCUA’s spokesperson elaborated on Harper’s concern: “HELOC debt can be a sign of financial strain,” the spokesperson added. “It isn’t necessarily indicative of financial strain, but it can signal situations in which borrowers are digging into their home equity to pay daily bills.”
The credit union industry appears to be listening. New HELOC commitments in the first quarter showed only a 4% increase, the newsletter reported. There are also signs that credit unions are pulling back on their marketing activities. This spring, for example, two of the top home equity lenders, as ranked by their SEO (search engine optimization) presence, were credit unions. In July, there were no credit unions in the ranking.
Will financial institutions become sellers?
As demand for home equity increased last year, there was a fair amount of discussion about the possibility of banks and credit unions becoming sources of liquidity to the non-banks and fintechs looking to enter the home equity space. Recently, however, there has been increased interest on the part of smaller depositories for selling at least some of their HELOC production to investors.
Over the past year, there have been a number of positive signs that a secondary market is developing for home equity assets. Although the market is still in its early stages, several PE firms and aggregators have begun buying HELs and HELOCs, and at least three rated securitizations, backed by home equity products, have come to market. According to industry trades, one major money center bank signaled its intention to buy and securitize more than $12 billion in home equity assets this year.
To take full advantage of an originate-to-sell strategy, banks and credit unions may want to re-evaluate their origination workflows and processes. Today, many community banks and credit union originators are still relying on paper-based processes for both first and second mortgages. By moving to a more digital process, lenders can reduce costs and errors, streamline the asset sales and delivery process, and provide greater convenience for customers or members. In first mortgage ROI studies, for example, the transition to eClosing and the production of eNotes, instead of paper assets, has been shown to save as much as $400 per loan.
To date, most of the eNote and eVault innovation in residential lending has been in the first mortgage space. But recently, at least one new OmniVault has come to market, and more will probably follow, enabling institutions to securely hold digital HELOCs, as well as first mortgage eNotes on the same platform. Originating home equity assets as digital contracts reduces time and human capital, storage and delivery costs for institutions, and makes it easier to batch, sell or pledge these assets as collateral.