Mortgage refinancing has had some success over the past two years. Borrowers rushed to take advantage of historically low interest rates, resulting in $5.5 trillion in mortgages in 2020 and 2021, according to Black Knight’s January 2022 Mortgage Monitor.
Enter 2022…and the winds have completely changed. As the Federal Reserve quickly adjusts interest rates higher, the housing market has responded with a sharp and sharp drop in mortgage refinances. Weekly mortgage applications are down 83% from a year ago, according to the Mortgage Bankers Association.
Homeowners have record levels of home equity and are still in financial need. While a cash refinance might have made sense last year, interest rates likely make a home equity loan a better financial decision.
HELOCs: before versus now
I remember from my days as a credit union loan manager that HELOCs were often a “sleeper” product. Mortgages, car loans and personal loans have almost always been the front line solutions. There were several reasons why HELOCs weren’t a go-to choice – but those same reasons no longer hold true today. I’m happy to count the ways things have become vastly different, in large part due to automation technology.
So: HELOCs were cumbersome for lenders.
Now: Processing and subscription can be done with one click.
So: The return on investment for HELOCs was lower than for other types of loans.
Now: Automation improves efficiency, reduces manual manipulations per file, and makes it easier to scale volume without more effort.
So: Borrowers often did not apply for HELOCs.
Now: Borrowers know they’re sitting on peak home values — and are constantly reminded by the steady influx of home equity offers.
Then (and also now): HELOCs did not get resources into the hands of borrowers quickly, taking weeks to process and close.
Now: Borrowers can get funds in as little as a week, with automation allowing for a close within days.
Simply put, in today’s rising interest rate environment, HELOCs should be a go-to and game-changing lending product.
Changing perspective: from background to high-value loan
HELOCs can be extended much more efficiently than in the past. In fact, you may be making them much harder than they should be! Digitization, advanced technology and updated processes can make HELOCs surprisingly quick and simple. Leveraging this trifecta benefits both the borrower and the institution – here’s why.
Technology is changing the “return on effort” equation. Many institutions treat HELOCs like mortgages and as such follow the same or very similar lending process. For the amount of effort, many lenders view the return as “unrewarding”, when they could extend other forms of credit more quickly and easily.
Home equity loans are actually quite different. They are not subject to the same requirements as mortgages, which opens the door to a more streamlined process. Credit unions today have access to automated workflows that can intelligently execute home equity loans quickly, consistently and accurately. With powerful technology working on their behalf, lenders’ perception of effort can quickly go from ‘unrewarding’ to ‘almost too easy’.
HELOCs are a good choice for most borrowers today. Many homeowners are sitting on large sums of equity in their home, but few want to refinance or take out a longer-term equity loan at a higher interest rate. HELOCs are an important tool to have in your loan portfolio to help you tap into these resource pools. HELOCs offer higher lines of credit at much lower rates than credit cards, allowing borrowers to pay only for what they use. And because it’s guaranteed, it can be used more flexibly to meet a wide range of needs.
Even those who need funds quickly will find value in HELOCs. Using the aforementioned automated workflow technology, a HELOC can be cleared to close in days, not weeks. With many institutions still requiring between 20 and 60 days, this is monumental progress. It’s a logical leap forward for community lenders who want to stay competitive against lightning-fast, tech-driven rivals eager to capture more of the financial services market.
HELOCs help diversify and mitigate risk in the portfolio. From my experience in credit union lending, I have seen how loan portfolios can become two-dimensional. Home and car loans are the daily bread of community credit institutions. However, the simultaneous rise in interest rates, car and house prices has significantly slowed demand for these two flagships.
Personal loans are another popular loan product, but they come with additional risks. Without collateral in play, delinquency and default rates can soar. In addition to potential portfolio risk, collection efforts require valuable time and resources.
Home equity borrowers are more likely to repay their loans on time. This can provide lenders with an attractive way to add diversification as the economy navigates a volatile market and meets the financial needs of their members and customers.
As the lending environment evolves, it is important to evolve with the expectations and needs of your borrowers. Is your institution ready to quickly and easily deliver the loan product that borrowers need most today? With the help of transforming technology, HELOCs are poised to be a game changer in 2022.
Scott Meier is a former credit union loan manager who oversees West Region sales for LenderClose, a West Des Moines, Iowa-based CUSO that automates home equity lending processes at scale using business decision intelligence.