Home Equity Lending: The Good, the Bad and the Compliance Challenges
By John I. Vong, CMB, CMT
November 26, 2018
John Vong, CMB, CMT, is president and co-founder of ComplianceEase, Burlingame, Calif., and a frequent contributor to MBA Insights. He can be reached at firstname.lastname@example.org.
If the home equity lending market were a character in a western movie, it might be called "The Comeback Kid." In 2007, lenders had $2.03 trillion in home equity lines of credit and closed-end second mortgages on their books, according to analysis from Inside Mortgage Finance. But then the crisis came and that number steadily dropped during the past decade to $1.02 trillion.
Today, home equity lending is poised for a strong comeback. A recent TransUnion study revealed that HELOCs represented the greatest number of home equity originations last year with 1.2 million loans closed--a 2.3 percent increase from 2016.
What's Driving the Home Equity Lending Comeback? (And What Could Speed It Up Even More?)
There are several factors driving the upswing in home equity lending. The first is rising home prices which, according to the latest CoreLogic Equity Report, have increased home equity nationwide by $1.01 trillion in Q1 2018 from Q1 2017. This has given the average homeowner an additional $16,300 in equity. Black Knight recently estimated that 44 million homeowners have $6.06 trillion in "tappable" home equity (defined as "the amount of equity available to homeowners with mortgages to borrow against before hitting a maximum 80 percent combined loan-to-value ratio").
Also, millions of homeowners took advantage of historically low interest rates over the past few years to refinance their first mortgages. Many of these homeowners are less inclined to refinance in this higher rate environment, and so are looking to home equity loans and HELOCs to tap into home equity. In addition, interest on some home equity loans/lines are still tax deductible, if the money borrowed is used to "buy, build or substantially improve the taxpayer's home," according to the IRS.
From a lender's perspective, the quality and performance of home equity loans and HELOCs has been strong. According to CoreLogic, HELOCs originated post-crisis, on average, have a combined loan-to-value of 61 percent, a credit score of 774 (30 points higher than the average credit score for HELOCs originated in 2005), and a debt-to-income ratio of 35 percent. Not surprisingly, this has led to HELOCs having lower delinquency rates: since 2009, the 60+ day delinquency rate 36 months after origination was "25 basis points, or about half of the rate in the very early 2000s." Closed-end seconds also have low delinquency rates--2.43 percent, according to the American Bankers Association's Q2 Consumer Credit Delinquency Bulletin.
Obviously, that's the good news. The less good news is that banks and credit unions have, for the most part, not significantly changed the way that they originate HELOCs. With a few notable exceptions, such as new propensity models, lenders are still originating HELOCs using manual processes. One reason for this may be that HELOCS, as a product, can fall into different silos, depending on the institution. One bank, for example, might originate HELOCs through their mortgage business while another might consider them to be consumer loans and handle them though their consumer banking operation. As a result, in the age of "rocket" mortgages, HELOCs today take significantly longer to originate than they did 10 years ago, comparatively speaking.
In fact, the average HELOC, from application to funding, takes 30 to 45 days to complete.
Using automated technology could help speed up the process so that eligible borrowers have access to their funds faster. Additionally, automated technology could be used to mitigate the regulatory risk that comes with HELOCs.
States Zeroing in on Home Equity Lending
Although mortgages in general have come under a great deal of scrutiny from federal regulators in the past, HELOCs, for the most part, haven't. In fact, banks and credit unions have been given a reprieve from new reporting regulations for HELOCs, particularly from the new Home Mortgage Disclosure Act collecting and reporting requirements. Late last summer, the Bureau of Consumer Financial Protection (formerly CFPB) finalized a rule that stated financial institutions originating 100 or more HELOCs, but fewer than 500 in 2018 or 2019 would not be required to begin collecting and reporting HELOC data until January 1, 2020. This temporary change in threshold was in response to concerns from smaller-volume lenders about the challenges and costs of reporting HELOCs.
While it may seem like HELOC originators are getting a break from the BCFP, it should be noted that each state has its own home equity lending laws, which can create complications for lenders, especially state-licensed independent mortgage companies with large multi-state footprints. Many states place regulatory requirements on subordinate lien loans that are different from those placed on first lien loans. It's also common for states to govern HELOC lending by yet another different set of limits and requirements.
One state known for its unique treatment of home equity loans and HELOCs is Texas. Voters in the state recently voted to amend the home equity lending requirements, effective at the start of 2018. The amendment lowers the limitation of fees that can be charged to the borrower from three percent to two percent; expands the list of lenders authorized to make home equity loans in Texas; and eliminates the 50 percent threshold for advances on a HELOC.
When it comes to mortgages in general, states have been much more active in exams and enforcements than the BCFP, in recent months. For example, this year, according to the Conference of State Bank Supervisors, 87 multi-state exams are scheduled. Also, state regulators, in coordination with the Multi-State Mortgage Committee, Multi-State MSB Examination Taskforce and the State Coordinating Committee, conducted more than 32,000 state-level examinations last year. All of this can make compliance challenging for banks and credit unions that do business in multiple states.
To keep up with various state home equity lending laws, lenders should regularly review and refresh their manuals to incorporate any new state rules that apply specifically to home equity loans. They should also update and train staff on changes. Additionally, lenders should reach out to their providers to verify that their loan origination systems or automated compliance technologies have been updated to comply with federal and state home equity laws. Doing so will allow lenders to take advantage of the growing home equity market while staying in compliance.
(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA Insights welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at email@example.com; or Michael Tucker, editorial manager, at firstname.lastname@example.org.)