Home equity lending is expected to be one of—if not the—fastest growing loan categories for the foreseeable future. While second mortgage liens are generally considered less complicated than first mortgages, they are by no means risk-free.
In part one of this three-part blog series, we delved into the Consumer Financial Protection Bureau’s increased efforts to monitor lenders to ensure that military personnel and veterans are receiving their benefits under the SCRA and how lenders could stay compliant under increased scrutiny and reduce risk by verifying this status. In this second part of the series, we’re looking at ways lenders can use automation to reduce home equity risk, including the risk of undetected senior liens.
Unique to Home Equity Lending
TransUnion expects that home equity lending will increase 25% by the end of 2023. This is hardly surprising since home equity products provide liquidity to equity-rich homeowners without forcing them to sacrifice their historically low first mortgage rates. And equity-rich they are. According to a report by Home Equity Lending News, American homeowners have nearly $18 trillion in tapped equity.
Risk in home equity lending tends to fall into several familiar categories: credit, capacity to pay, collateral valuation, and human errors in underwriting, like missed liens or overlooked flood certifications that increase the likelihood of default or that might scuttle a deal. One of these issues, which is unique to home equity lending, is the presence of senior liens.
Home equity lenders expect to be in the second-lien position behind traditional first mortgages. But there is a subset of senior liens that can derail a home equity origination. These include
private mortgages to help identify interest only and partially amortized features, originated within the last 12 months, first mortgages with negative amortization, a reverse mortgage, a balloon loan with a due date before the second loan, as well as deferral and forbearance activity.
Identifying these senior liens has traditionally been a manual, stare-and-compare process conducted by an underwriter, which adds time and cost to the origination process. And therein lies the rub… and the risk. Home equity origination tends to be a no- or at least low-cost product for consumers, meaning the lender absorbs many of the costs that are traditionally passed on to borrowers in a first mortgage transaction. Home equity loans also tend to be smaller than first mortgages, all of which increases the pressure on margins.
As a result, the last thing a lender wants to do is to is invest resources in underwriting time and the cost of settlement services on a loan they can’t ultimately close.
Finding a Path Forward to Uncover Senior Liens
Last year, First American Data & Analytics introduced FraudGuard® Home Equity: an affordable and streamlined solution that assesses home equity risk without adding unnecessary steps to the origination process. It’s a single-source, comprehensive solution for home equity risk management that covers 100% of U.S. properties and has more than 32 risk alerts, including data on ownership, identity, flood and FEMA disasters, property valuation, market conditions and HOA associations.
Recently, we enhanced this solution with the addition of a senior-lien review module that identifies any ineligible senior liens that would block origination on a second lien and automatically alert an underwriter, so there is less chance of a human error. Mining this important data using the power of automation provides lenders with an accurate and effective solution to confirm senior lien status and ensure compliance in home equity lending, all while saving time and money.
In any lending environment, reducing risk, improving loan quality and increasing underwriting productivity are top priorities. In the current cycle, lean budgets mean these priorities need to be addressed efficiently and with the most up-to-date and accurate data.
Our customers can rest easy knowing that this module is available in FraudGuard can reach out to their First American Data & Analytics representative to get it activated.
If you’re not a current FraudGuard customer and would like to learn about this module and our FraudGuard solution, connect with us to get a demo scheduled.