6 questions mortgage lenders must answer before offering home equity products
August 22, 2022 8:08 AM
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For originators looking to replace lost business in a high interest rate environment, home equity lending is back in vogue.
Among those lenders getting recently into this game is Rocket Cos., which recently launched a closed-end product. Meanwhile, Figure Technologies entered into white labeling relationships with three nonbanks — Guaranteed Rate, Synergy One and its erstwhile merger partner Homebridge — so they can offer home equity products.
And there's good reason to consider doing so. Tappable home equity reached a record high in the second quarter at $11.5 trillion, up by $500 billion from the first quarter and by $2.3 trillion over the second quarter of 2021, Black Knight said. The average homeowner had $216,900 in tappable equity, up $9,700 (5%) over the prior quarter and $43,400 (25%) from the same time last year.
Whether working with a firm like Figure or going it alone, originators starting a home equity lending program, or those whose existing offerings are ramping up again, the issues below are important to consider:
Among those lenders getting recently into this game is
And there's good reason to consider doing so. Tappable home equity reached a record high in the second quarter at $11.5 trillion, up by $500 billion from the first quarter and by $2.3 trillion over the second quarter of 2021, Black Knight said. The average homeowner had $216,900 in tappable equity, up $9,700 (5%) over the prior quarter and $43,400 (25%) from the same time last year.
Whether working with a firm like Figure or going it alone, originators starting a home equity lending program, or those whose existing offerings are ramping up again, the issues below are important to consider:
Which products to offer: closed or open-end or both?
Home equity products come in two varieties — open-end, commonly referred to as a line of credit where the borrower can take draws at any time, and closed-end, in which all the funds are disbursed at closing.
Reverse mortgages are also a form of home equity lending, but these are specialty products that can only be given to qualifying borrowers who are over the age of 55.
"This is probably the time in the marketplace that we see more distinction between a fixed type of a second mortgage loan as compared to a home equity line of credit," said Steve Ferringer, executive vice president, enterprise business development, at Incenter. "In fact, I've had to train myself to not just use the phrase HELOC because that's only part of it."
If a lender wants to add a home equity program, first, they need to look at the demographic of the consumers they're aiming to serve. "They need to make some decisions about whether they want to offer both products or one or the other," said Chris Boyle, president of home lending at fintech Roostify. "And part of that is really doing a comparison of the economic terms for the consumer."
The market shifts constantly in "the crazy mortgage business.
"Today's refinances, tomorrow's purchase money and the day after that it's HELOC versus purchase money," Boyle said. "You've got to be ready to really serve those consumers and serve them in a very comprehensive, digital way."
Reverse mortgages are also a form of home equity lending, but these are specialty products that can only be given to qualifying borrowers who are over the age of 55.
"This is probably the time in the marketplace that we see more distinction between a fixed type of a second mortgage loan as compared to a home equity line of credit," said Steve Ferringer, executive vice president, enterprise business development, at Incenter. "In fact, I've had to train myself to not just use the phrase HELOC because that's only part of it."
If a lender wants to add a home equity program, first, they need to look at the demographic of the consumers they're aiming to serve. "They need to make some decisions about whether they want to offer both products or one or the other," said Chris Boyle, president of home lending at fintech Roostify. "And part of that is really doing a comparison of the economic terms for the consumer."
The market shifts constantly in "the crazy mortgage business.
"Today's refinances, tomorrow's purchase money and the day after that it's HELOC versus purchase money," Boyle said. "You've got to be ready to really serve those consumers and serve them in a very comprehensive, digital way."
Which segment to serve?
A related question is what customer does a new lender want to go after?
"For example, do we want to be just a one size fits all type of a shop until we get our feet under us and we know what we're really doing?" said Ferringer. "Or do we come at it with a flexible type of a lending process that would allow us to distinguish between key markets like a general audience, a private wealth sector, or even based on the value of the properties that we're dealing with?"
Rising mortgage rates might make some borrowers leap at the fixed rate product where they can lock in a rate, Ferringer said.
Others might want that line of credit where it is a tool that they can tap into based on their immediate needs.
"For example, do we want to be just a one size fits all type of a shop until we get our feet under us and we know what we're really doing?" said Ferringer. "Or do we come at it with a flexible type of a lending process that would allow us to distinguish between key markets like a general audience, a private wealth sector, or even based on the value of the properties that we're dealing with?"
Rising mortgage rates might make some borrowers leap at the fixed rate product where they can lock in a rate, Ferringer said.
Others might want that line of credit where it is a tool that they can tap into based on their immediate needs.
Is your organization properly set up for it?
In some depositories, home equity is not part of the mortgage operation. Instead it is lumped with other forms of consumer lending, both secured and unsecured, as those loans tend to go into asset-backed securities.
That is a suboptimal situation, Boyle said.
Consumers are looking for a digital experience where they canself-serve and they can shop but they also want all of their options, especially when it comes to their home, in one spot. "They don't want to have to go over here for this and over there for that," said Boyle. "I think those bankers that are going to be successful going forward will resituate themselves to thinking about it from the consumer lens as opposed to the execution in the capital markets."
Furthermore, having a unified experience with mortgage and home equity is a competitive advantage for these lenders, especially when consumers deal with solicitations from other providers, Boyle noted.
It also includes having the right technology in place that lets the loan officer get the full picture of the borrower when it comes to mortgage and home equity.
"Bankers are already sitting there with a full cadre of information about that consumer and in many cases can just run the options," Boyle said. Those marketing both products can use technology to tell the customers, "Well, I know a lot about you because you bank with us; let me just double check some of your information."
No matter which product, lenders need to make this an easier process for their customers. A disjointed process will impact lenders ability to execute the transaction for the consumer, especially as the client is getting solicited by other providers, said Boyle.
It's the old adage about a consumer being able to walk into a lending institution and obtain a car loan — a depreciating asset as opposed to a home — "very, very simply," Ferringer said. "And yet, regardless of the mortgage product, I don't believe we're still there yet for what the consumers are expecting that process to look like."
That is a suboptimal situation, Boyle said.
Consumers are looking for a digital experience where they can
Furthermore, having a unified experience with mortgage and home equity is a competitive advantage for these lenders, especially when consumers deal with solicitations from other providers, Boyle noted.
It also includes having the right technology in place that lets the loan officer get the full picture of the borrower when it comes to mortgage and home equity.
"Bankers are already sitting there with a full cadre of information about that consumer and in many cases can just run the options," Boyle said. Those marketing both products can use technology to tell the customers, "Well, I know a lot about you because you bank with us; let me just double check some of your information."
No matter which product, lenders need to make this an easier process for their customers. A disjointed process will impact lenders ability to execute the transaction for the consumer, especially as the client is getting solicited by other providers, said Boyle.
It's the old adage about a consumer being able to walk into a lending institution and obtain a car loan — a depreciating asset as opposed to a home — "very, very simply," Ferringer said. "And yet, regardless of the mortgage product, I don't believe we're still there yet for what the consumers are expecting that process to look like."
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What is your loan exit strategy?
If a lender is serious about offering home equity, another question to ask is "Do I want to originate to hold in our portfolio or do I want to be a secondary market participant with our end product?" said Ferringer.
"That can have some major ramifications on how aggressive you get with innovative process things that are available with some of the technology" that is available.
An opportunity exists to apply some of the leading edge technology on the first mortgage side into home equity. But lenders that are going the secondary market route need to be careful not to box themselves in, as others on the food chain need to approve its use," Ferringer continued.
"That can have some major ramifications on how aggressive you get with innovative process things that are available with some of the technology" that is available.
An opportunity exists to apply some of the leading edge technology on the first mortgage side into home equity. But lenders that are going the secondary market route need to be careful not to box themselves in, as others on the food chain need to approve its use," Ferringer continued.
Is your underwriting responsible?
Ferringer recalled in the past, lenders made "a race to the bottom" when offering HELOCs just to put them on their books. But that was an expensive cost to their balance sheet, as values dropped; plus in many cases the line went unutilized.
"They ended up with a very tough squeeze on profitability related to home equity loans," said Ferringer. "I sincerely think that's why some of the major players kind of put a pause button there for a number of years until they could say 'how can we make money at this business?'"
Back in the mid-2000s, a lot of shortcuts were taken with the due diligence products that home equity lenders used, Ferringer noted. The conversation likely went "You have X amount of equity in your property, at least we think so; we're going to make a trust loan here," he said. "That clearly has changed because now you have [verification] tools you can access fast and actually at a discount from the cost that were the alternatives back in those times."
Today's property values make home equity lending an attractive proposition again, no matter which version it is.
"This is real value, and it's not going to turn around anytime quick," Ferringer said. "So now, if you take a diligent approach, you're going to be in a much better position than we saw in the past."
"They ended up with a very tough squeeze on profitability related to home equity loans," said Ferringer. "I sincerely think that's why some of the major players kind of put a pause button there for a number of years until they could say 'how can we make money at this business?'"
Back in the mid-2000s, a lot of shortcuts were taken with the due diligence products that home equity lenders used, Ferringer noted. The conversation likely went "You have X amount of equity in your property, at least we think so; we're going to make a trust loan here," he said. "That clearly has changed because now you have [verification] tools you can access fast and actually at a discount from the cost that were the alternatives back in those times."
Today's property values make home equity lending an attractive proposition again, no matter which version it is.
"This is real value, and it's not going to turn around anytime quick," Ferringer said. "So now, if you take a diligent approach, you're going to be in a much better position than we saw in the past."
Is this the right opportunity for your business model?
"I think there's multiple reasons why each of the products can have a place in play," Ferringer said. "And that's been consistent with our conversations with the C-suite of the various lending institutions."
Nonbanks see the market fundamentals and want to participate in this market. "Not all the nonbanks are going to make it in the long run," said Ferringer. "But, I don't think those are weaknesses in their home equity strategy."
Rather it's just the normal shakeout seen when a market shifts and participants had other fundamental weaknesses that are brought to light.
For "the serious nonbank participants, my prediction would be that we will see more of the traditional second mortgage lending as their preferred product of expertise," he continued.
Nonbanks see the market fundamentals and want to participate in this market. "Not all the nonbanks are going to make it in the long run," said Ferringer. "But, I don't think those are weaknesses in their home equity strategy."
Rather it's just the normal shakeout seen when a market shifts and participants had other fundamental weaknesses that are brought to light.
For "the serious nonbank participants, my prediction would be that we will see more of the traditional second mortgage lending as their preferred product of expertise," he continued.
