One of the most common ways your borrowers can suffer significant loss of income is through a disability. While many disabilities cause only temporary loss of income, the average long-term disability ...
One of the main sources of wealth among American families is homeowner equity. According to a report from the Federal Reserve1, household net worth in this country rose to a new record, hitting $98.74 trillion. But what does record-breaking homeownership mean in today’s world and how will it affect your financial institution? Increasing wealth from homeownership is positive for our economy, but one lingering concern is rising interest rates and increased home prices. We know that these numbers are projected to rise which could change consumer buying habits, i.e. homeowners may opt to renovate their home rather than sale and purchase a new one. By increasing your focus on home equity lending, you can provide your customers with options that may benefit them and their current situations.
When it comes to lending in today’s world, home equity loans are at their prime. They offer borrowers lower interest rates, little to no closing fees, and the ability to increase their cash flow for larger expenses like paying off credit cards, home improvement projects, or paying for college education. With more Americans tapping into their home equity, it’s no surprise that home equity lines of credit (HELOCs) and home equity loans are on the rise. According to a report conducted by TransUnion2, approximately 10 million consumers are expected to originate a HELOC between 2018 and 2022. This would more than double the 4.8 million HELOCs originated in the previous five-year period (2012-2016).
Chances are that many of your customers share similar financial goals i.e., paying off debt, investing, building for retirement. As a financial institution, knowing how you can leverage market conditions while effectively implementing products and services to build your lending portfolio with your borrowers and your bottom line in mind is crucial. Increasing engagement and implementing programs that add value are key to deepening the servicer-customer relationship.
But what happens when you have to keep turning down potential borrowers?
It can certainly be frustrating when a good borrower does not qualify for a home equity loan because they do not meet required loan-to-value (LTV) guidelines. There are steps that your financial institution can take to help expand the LTV requirements, giving the borrower more equity to work with, and providing lenders the ability to expand established lending guidelines and generate high-quality loans to valued borrowers while taking steps to mitigate some of the risk. In recent years, there has been an increase in the number of lenders who have relaxed on their LTV guidelines. Sound risky? It can be if you don’t know what products to implement or what steps to take to mitigate additional risk. There are programs i.e., equity default protection programs, that offer alternative lending solutions that are more flexible and allow more customers to obtain an equity loan that may have been denied in the past.
Finding a partner that you can work with in order to provide expanded guidelines through their program while mitigating your financial institution’s risk can be a powerful solution. With an equity default protection program, lenders are able to open the door to more home equity loans and gain a competitive advantage over other lenders while strengthening customer relationships. This type of program can increase revenue, allow your financial institution to gain new borrowers and retain existing ones, and it creates new cross-selling opportunities. Equity default protection does not make bad loans good. Instead, it broadens the loan eligibility spectrum, expanding your reach access to strong credit borrowers. Another item to keep in mind when looking for the right solution is that as rates increase, refinanced loans will more than likely decrease since borrowers will not want to get locked into higher rates. Implementing more relaxed loan approval standards will help alleviate the decrease in refinanced loans by increasing the new home equity loans that you are adding to your portfolio.
As a financial institution, the relationships that you have with your customers can make or break you. Always having them in mind when it comes to effectively implementing the right products and services at your institution can drastically impact your bottom line and strengthen customer relationships. A focus on home equity lending benefits your customers and your financial institution.
Chuck Mureddu has more than 30 years of combined mortgage lending experience, including appraisal management, institutional risk, loss mitigation, and whole loan exit and securitization strategies. As the Chief Valuation Officer for SWBC Lending Solutions, Chuck is responsible for all valuation policy and process, quality assurance, and regulatory compliance.