Home values are rising across the country. Zillow recently reported that national home values rose 4.8% to $186,200, according to the first quarter Real Estate Market Reports.
Entry level homes are rising in value the fastest, according to the company, which Zillow says is making it tough for first-time buyers to enter the market this spring.
That fact, added to the fact that we’re experiencing a bit of an inventory shortage, could make this a tougher than normal spring buying season for purchase money lenders. Zillow reports that there are 5.9% fewer homes for sale in the U.S. than a year ago.
Even though the Federal Reserve has backed away from committing on additional interest rate increases this year, no one believes that mortgage interest rates will stay low forever or will return to their historically low rates, giving few homeowners reason to refinance. In fact, most people in the industry expect rates to rise eventually, further stifling the refinance business.
One part of the business that could benefit from these two trends is home equity lending.
With the value of a homeowner’s property increasing and no incentive to refinance, the only way to cash out is through a home equity loan. In fact, according to USA Today, consumers already realize this.
In a recent story, USA Today cited Equifax’s announcement that “lenders originated home equity lines of credit with limits of $146.1 billion in 2015, up about 20% from 2014 and the third straight year of growth at that level or higher.”
When the story came out in March, average home prices were up 35% from 2012 and were just 4.9% off of the 2006 peak, according to S&P/Case-Shiller, also quoted in the article. But executives at Equifax pointed out that underwriting was still strict.
Annamaria Andriotis, writing in the Wall Street Journal in the same time period, wasn’t so sure. She pointed out that some lenders are already allowing borrowers with high credit scores to withdraw up to 95% of the home’s equity and making home equity loans to borrowers with credit scores as low as 660.
Andriotis pointed out that competition for home equity borrowers is heating up, quoting LendingTree as saying that “37% of homeowners who have less than 20% equity in their homes and who applied for HELOCs through its website in February were contacted by lenders interested in possibly giving them a new line. Just 9% of those homeowners were contacted a year prior.”
It appears that this spring-buying season, many lenders will be left either trying to entice Millennials into the first-time homebuyer market or chasing home equity loans. Either path will have its challenges, but the latter will be significantly easier with the right information. We have found that there are really two key pieces of information that a lender must have to effectively target and prospect home equity borrowers.
Those lenders who develop good systems for gathering these two sets of information will be more likely to find homeowners who are in the home equity buy zone ahead of their competitors.
The first piece of information is the customer’s credit profile. The second is the public record information relating to the real estate. When the information gathered in these two areas lines up, it suggests that there may be an opportunity.
The credit report is straightforward. While there has been talk for years about moving away from Fair Isaac’s FICO score toward a more inclusive measure of a consumer’s credit capacity and character, nothing has come close to replacing the industry standard.
Each lender will have its own underwriting standards and since many home equity loans are held in portfolio, each lender will determine their own risk appetite.
Still, the credit report is an excellent go/no go gate with which to begin the process.
If the borrower is creditworthy, the next step is to gather information about the subject property. Many changes can occur that impact the property after the loan is boarded into the servicing system. Even if the institution services its own loans, it cannot be sure that the situation is the same as it was when the original loan was underwritten.
At a minimum, the lender must know
- The current owner of the property or vesting information
- Property conveyance from the prior owner to the current owner
- About any open mortgages
- About any Judgments & Liens
- Tax information and status
- The complete legal description
Comprehensive property reports exist that can provide all of this information in a very short timeframe. That’s important because for home equity lenders, time is of the essence.
When consumers need to access their home equity, they are likely to have a pressing need. This will reduce the size of the window of opportunity and drive borrowers to the first lender that agrees to work with them on the loan.
Borrowers often assume that the underwriting process for a home equity loan or line will be shorter than that of a purchase money loan. Often, that is not the case. Many large lenders alert borrowers on their websites that the underwriting process for these loans can take 45 days to complete, from the time the application is submitted.
That makes it vitally important that lenders who hope to compete for home equity loans identify prospects ahead of their competition in order to be the first to approach the borrower.
In order to move quickly, lenders should seek out a vendor partner that can provide both credit information and property information, allowing them access to all of the information they need to advance an offer as quickly as possible. Choosing the right information provider will also reduce risk during the underwriting process as the information acquired will be accurate.
This bundled services approach to home equity loan prospecting works quite well for community banks and credit unions that already have a portfolio of loans that they are servicing that quite often have HELOC opportunities hiding within them. There are not very many bundled services offerings in the market that can meet this need, but quality options do exist.