Omar Jordan: Home equity loans set to rise as homeowners mostly stay in their positions

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PERSON OF THE WEEK: Owing to the rapid rise in home prices, homeowners have built up considerable equity in the past year. And they’re tapping into that equity more and more for home improvements, including backyard shrines.

The demand for home equity loans and lines of credit is likely to increase as many homeowners – following pandemic lockdowns – who might otherwise have ‘increased’ now find themselves ‘trapped’, due to the rising prices and lack of stocks. And as interest rates rise, home equity loans will become more attractive compared to refinancing.

As Omar Jordan, CEO, Founder of LenderClose says Mortgage Orb, now is the time for mortgage lenders to jump on the trend if they haven’t already.

Q: Why is it now time for financial institutions to consider adding home equity loans to their offerings?

Jordan: As interest rates start to climb, consumer demand for access to home equity will shift from refinancing their first mortgage, which is already below 3%, to second mortgages. rank and home equity lines of credit for debt consolidation and / or withdrawal. transactions.

More and more people stuck at home during the pandemic are modifying their homes with home improvement projects. This is evident from the increased demand for building materials which has been higher in the past 12 months than in previous years. People also spent a lot during the pandemic to send consumer debt to near an all-time high since the 2009 financial crisis. These are two of the main reasons people get a home equity loan.

While people were increasing their debt, they weren’t spending any money last year. Community banks and credit unions have seen current and savings account balances increase dramatically. Financial institutions (FIs) currently maintain record levels of liquidity and, through home equity loans, they can increase their profit margins. Add to that the shortage of real estate inventory which is the catalyst for rising home values, now is the perfect time for lenders to offer home equity loans.

Q: What do you think is behind the reluctance to take the plunge?

Jordan: Community lenders have not necessarily withheld home equity loans. Consumer demand did. The low interest rate environment made refinancing more attractive. While we’ve seen headlines touting mega-banks such as Wells Fargo, Chase, and Citi halting their HELOC programs during the pandemic last year, credit unions and community banks have continued to serve their members and customers to meet their financial needs.

Q: What type of lender should consider creating home equity loans?

Jordan: Every lender should take this into account. It’s about building a relationship with customers. User experience is not just what online banking software looks like. This is also what a client feels when dealing with their financial institution. And mega-banks, with their universal policies, have made it easier for community lenders to offer personalized solutions and generate more business.

Q: Why have home equity loans gotten a less than favorable reputation? What can lenders do to correct this?

Jordan: In the current environment or over the past 2-3 years, there have been a few factors that have made refinancing a first mortgage much more attractive than taking out a second home equity mortgage.

Interest rates are at their lowest. So it naturally makes sense to refinance a loan at a low interest rate and be able to meet certain goals such as withdrawing funds for debt consolidation and / or home improvement projects.

In 2018, a tax bill was passed that prevented mortgage interest from being deducted from tax unless the loan was used to buy, build, or significantly improve one’s home. I believe this added a slight distaste for second-tier equity borrowing from a consumer perspective.

Finally, the TILA-RESPA Integrated Disclosures (TRID) guidelines, requiring fixed-term home equity loans to maintain the refinancing process for a fixed-term first mortgage. This created certain levels of “unnecessary” friction in the process for loan officers, processors and underwriters. I say “unnecessary” because the internal lending policies of some, if not most, lenders have been in need of a refresh for years.

Q: What is the most inefficient home equity loan business and how do you fix it?

Jordan: Lenders tend to create unnecessary policies and place process bottleneck requirements on top of the Dodd-Frank Act on Wall Street Reform and Consumer Protection.

A good example here is evaluation. In 2010, the interagency valuation and valuation guidelines gave financial institutions the option of using other valuation sources instead of the traditional 1004 valuation format for certain transaction amounts. Yet we continue to see certain levels of reluctance and a failure in the status quo mentality to require an appraisal for a home equity loan of $ 50,000 or even $ 10,000. It is completely unnecessary.

An appraisal of 1004 or even 2055 not only costs the financial institution and consumers money, it also adds weeks to the process, making the experience unappealing for borrowers.

I can go into my bank or credit union now and apply for an unsecured personal loan of $ 5,000. And I’m going out in 30 minutes with the money in hand. But, if I give you my most precious possession – my house – as collateral for the same $ 5,000, are you going to keep me waiting a few weeks? Something doesn’t look right here.

The same goes for title insurance requirements. Again, completely unnecessary to acquire a title insurance policy on a second mortgage. Especially if the first mortgage is with the same financial institution. What are we trying to accomplish here? Isn’t the objective to ensure that the lender will maintain its privileged positions? A simple current owner title search and / or privilege protection policy should check this box.

The bottom line is that it’s not the CFPB’s fault that a home or home loan cycle takes longer than we’d like. Financial institutions have not invested the time to review their internal lending policies, which does more harm than adding any level of risk tolerance in their favor.

Q: Where do you see home equity loans in the near future?

Jordan: The next year or two, maybe three years are the original years for home equity and non-conforming loans. As lenders realize that having large amounts of money on their balance sheets is not necessarily a good thing and that it should be loaned, we will begin to see a surge in mortgage origination and equity loan origination. non-compliant.

Additionally, consumer demand will begin to shift to these types of loans as interest rates begin to rise, especially if granting a non-conforming loan cuts the underwriting process by weeks. This means that if FIs start to become more aggressive in meeting the expectations of their borrowers and removing unnecessary requirements from their lending policies, they can enable a better user experience for both sides, their staff and their borrowers.

Q. Do you think GSEs will ever have a greater appetite for home equity loans?

Jordan: Absolutely. GSEs have an obligation to their shareholders to continue to generate income. As we start to see a shift for non-compliant loan programs, GSEs will want to take advantage of this opportunity.

Q: What does it take to be successful in the real estate equity market?

Jordan: The answer here is simple: pay attention to what is going on right now. Fintechs rely on community lenders to maintain their business as usual processes and policies. It’s an unlimited opportunity for Google Bank or Apple Mortgage to start offering home equity loans. They have a much stronger relationship with their customers than any bank or credit union could dream of.

Also pay attention to what your customers are doing. How do they buy houses? Groceries and now cars are delivered to your front door with no need to go to the dealership. It doesn’t take someone with a doctorate to see the changing trends in consumer behavior and expectations.

Question everything. Ask yourself the following questions: What are my clients’ expectations for how loans should be made? The problem I see with mortgage borrowers today is that the vast majority don’t really know better. They have not read Regulation Z or have not had their share of TILA and / or RESPA training. They expect a home equity loan or a first mortgage to take 30, 60 or 90 days, but not for long. Fintechs are working smarter than banks and credit unions to maximize this potential.

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