Are HELOCs the new cash-out refis? Given the steep rise in interest rates and the sharp decline in refinance volume, HELOCs and other home equity products are now top of mind again at many banks, credit unions and fintech lenders. Nonbank lenders are also exploring these products, working in tandem with investors looking to create a secondary market for home equity.
There’s no question that going forward HELOCs will be the product of choice when equity-rich consumers need liquidity. The better question is: Will our industry originate and market HELOCs the same way they did 10 or 15 years ago, or will lenders take advantage of new data sources and technology to safely and more efficiently capitalize on this opportunity?
In Part I of this two-part blog series, we’ll explore how lenders can reduce risk and decrease costs for more efficient and profitable HELOC originations, and in Part II, we’ll look at how to use data to increase marketing ROI.
Finding Better Answers
HELOC lenders know that to compete effectively, they have to find ways to collapse the origination timeframe and increase efficiencies, especially since customers expect HELOCs to be fast and low to no cost. At the same time, they have to manage HELOC risk since mistakes can be costly.
Unlike first mortgages where the rules and requirements are more codified, HELOC originators have significant latitude in determining how they want to assess risk. And increasingly, they also have new lower cost options that they can use to determine value, ownership, borrower identity and lien position.
This gives lenders the ability to mix and match solutions based on the organization’s overall risk tolerance as well as the specific risk associated with the borrower or property. For example, a long-time customer with good credit and 50% CLTV requires significantly less scrutiny than a lead generated by an outbound, non-client marketing campaign. With this flexibility in underwriting documentation, we’re seeing more and more lenders use both new and existing tools to satisfy approval requirements. For instance, many lenders are choosing to use AVMs in lieu of a full property appraisal. AVMs are faster (instantaneous versus a week to 10 days for an appraisal) and they cost significantly less.
Like the collateral process, confirming a clean title chain can also vary based on state and lender requirements. One common theme is there needs to be a check of ownership status, confirmation of any unknown liens and judgments that may have come up since the first mortgage was originated, and making sure the property’s tax payments are up to date. To obtain this information early and in an automated way could help reduce spend on evaluating existing liens on a property.
Some of our clients are using the First American TotalView report to fill this bill. It includes information on a property’s current owner, parcel and property characteristics, conveyance information from past owners, open mortgages, outstanding liens and judgments, real-time property tax data and estimated property value range. The data-rich reports provide detailed borrower and property information, saving both time and money.
Lenders are also supplementing their evaluation with a First American TaxSource™ report that can be returned in minutes to determine lien position and tax status. Using this automated tool also significantly reduces the need for manual tax searching (lowering costs) and cuts days off turn-times, even in the counties with the longest response times.
New Streamlined Solutions
Our company recently introduced FraudGuard® Home Equity which provides a single source of data and information specifically geared for HELOC risk assessment, allowing lenders to originate and close quickly without cutting corners on managing risk.
Best practices call for lenders to access accurate data on undisclosed liabilities, identity validation and occupancy discrepancies as well as to check all applicable loan participants against industry exclusionary lists, all of which is available in FraudGuard Home Equity. It also provides a comprehensive property valuation report that includes property type, listing status and homeowner and condo association data. There are even modules within the solution that can identify liens, judgments and other components found in a full property report.
Tapping into accurate, cost-efficient and timely loan-level and borrower data can allow even smaller lenders with lean budgets to compete in the ever-competitive HELOC space.
Keeping Up with the Fintechs
New tech-savvy lenders, including fintechs that specialize in HELOCs, are challenging banks and credit unions to rethink their processes and invest in technology and automation to deliver accelerated HELOC decisions in order to remain competitive. In fact, one major lender just announced a 100% digital HELOC.
As large money center banks and fintechs refocus their efforts on home equity, smaller banks and credit unions may find themselves at a disadvantage unless they incorporate at least some level of automation into their underwriting processes.
We’ve had new clients come on board who are still calling county recorders’ offices and waiting 15 days to validate if a property’s taxes are paid. We’re able to offer them the most basic entry level of automation that removes the need to manage multiple logins for various county recorder and tax collector offices, providing the ability to validate property tax status in real time. From there, they can move to the next stage of running custom solutions and then progress to setting up API data transfers that fit seamlessly into their existing platforms.
Our goal is to meet lenders where they are and walk them from the most basic level of automation all the way into more dynamic automation solutions, while still minding their resource and budget constraints. We engage to understand a lender’s biggest pain points and the things that take the longest in the origination process so that, together, we can devise solutions that collapse the cycle.
The bottom line that we’re hearing from lenders is that they want two things: They want the cost to originate HELOC loans to go down and they want the efficiency to increase. Lenders with non-dynamic platforms are recognizing that with the right partner and the right tools they can automate at any level. Embracing the idea of “outsourcing automation” provides an affordable path forward that can begin today without waiting for the perfect conditions and approval of a sizeable budget to overhaul systems all at once.
For more information on how lenders can increase efficiencies and decrease costs with HELOC lending, visit our Home Equity solutions page.