HELOC growth at fintechs points to potential shift for nonbanks

Figure Technologies on Wednesday recorded its sixth-consecutive record month of demand for its home equity lines of credit, adding to signs HELOC interest is growing, even for nonbanks.

Non-depositories historically haven’t been active in HELOCs, but there are exceptions like New Residential and fintechs like Figure and Button Finance, which offer these countercyclical products because they’re easier to automate than traditional mortgages. Fintechs in particular are now reporting HELOC growth at the same time that banks are showing more interest in the product.

“Based on our conversations, a big percentage of nonbank lenders are trying to figure out how to do this product right now because, anyone who is doing mortgages, their volume has dropped,” said Jackie Frommer, chief operating officer, lending, at Figure Technologies. “People who have servicing portfolios also don’t want to see their customers bought away, and because they have the first lien and customer risk already, it’s natural for them to be able to offer a second.”

Figure’s HELOC originations of more than $200 million in April suggest significant growth compared to an average of just $100 million per month in the fourth quarter of last year. Weekly business flows for these loans have also started to pick up at Button, according to Josh Hager, head of mortgage operations at the company, which lends directly and through brokers.

“We are seeing an increase in volume,” Hager said in an interview, noting that wholesale volume has been particularly strong. “We're probably getting about 15 to 20 new deals a week.”

So far, it looks like fintechs in the space are positioned as niche players and not necessarily a direct competitor for other lenders. Figure has a partnership with and plans to acquire a nonbank called Homebridge. It also has business partnerships with banks and credit unions as well as other non-depositories for whom it offers the product on a white-labeled basis, Frommer said.

“I think 15% or so of the volume is through this white-label or correspondent type of relationship right now, but we're expecting that to grow,” Frommer said in an interview, noting that the bulk of the company’s business is direct retail. “Our affiliate channels are growing as well, so there's just a ton of demand.”

Figure counts on a mix of consumer and business-side technology to market its services to other nonbank lenders.

“We service all of these on blockchain, so you can see payments customers made in real time. We have a system where investors can look at the performance and buy loans,” said Frommer.

On the consumer side, HELOCs can be more automated because they don’t have to go through the same kind of underwriting as traditional mortgages. If they are open-ended lines, they may be exempt from certain regulatory requirements around origination timelines, according to Hager.

“You have this advantage of being able to use an automated valuation model instead of an appraisal. We're not required to have title insurance, but we have metrics and guardrails,”  he said.

HELOCs historically have been more of a bank product in part due to their ability to fund loans with short-term rates using deposits that correlate with them. Figure addresses this by offering a product that takes a hybrid approach to interest rate type.

The product ensures utilization of the line by requiring an initial draw of the full amount, around $75,000 on average in Figure’s case. Subsequent draws can be made as the line is repaid.

“We initially fix the rate based on a lot of different factors and then we know the margin relative to the prime rate, so any future draws are done at the margin of the original draw to prime,” Frommer said. “Every draw is fixed at the rate that was set at the beginning of the draw, but each subsequent draw might have a different rate.”

Nonbanks typically don’t hold HELOCs long-term in portfolios like banks and credit unions do, but rather initially fund loans through warehouse lines of credit before selling them to investors. So, the extent to which non-depositories will be active in the product could depend on the availability and price of secondary market executions. Credit unions have been particularly eager to buy the product and offered pricing that has made discounts of up to 50 basis points possible, Frommer said

As far as the secondary market options available, there is some interest in HELOC securitizations but it’s been scant given the relatively low volumes seen until recently. Spring EQ, however, did recently securitize a mix of HELOCs and closed-end second-lien loans.

“The portfolio bid is probably right now a better opportunity,” said Willliam “Bill” Shuey, chief credit officer and director of securitization at Wipro Opus, in an interview. Shuey has been consulting with companies considering secondary market prospects for HELOCs.

Fintechs could be key contributors to feeding a securitized market. Generally, because HELOCs can be known quantities with established first liens, verification can be faster and more automated, but potential fluctuation in home values that could reduce equity levels needs to be addressed.

“You want to control the risk by understanding that there still is equity in the product at the end of the day,” said Shuey. “Home prices are still increasing, but the acceleration is not as high as it has been in the past.”