Home Equity Lending Demands Clear, Honest Look

MADISON, Wis. – Home equity loans can perform like superglue attaching members to their credit union, but before you take the cap off the tube you better have a clear idea just what the program involves. That’s especially true today, according to Bill Klewin, VP/lending at CUNA Mutual Group. “Certainly the real estate market has made people acutely aware of the value of their homes, and the fact there is value to tap there,” Klewin says. “At the top of the market there’s frothy activity, people giving up their jobs to sell real estate.” “There is a lot of lending business out there. But by the same token, it means everybody in the world is interested in that business. You have a lot of competition, competition that is saying, `We need to get into this business right now, and we’re going to do everything and anything we need to do to be there first with products.’” Klewin believes the big challenge credit unions face is making it known they offer home equity loans. At the same time, he thinks there has been considerable progress. Late last year CUNA Mutual studied real estate lending strategies and trends among credit unions $50 million or more in assets. When asked about the effectiveness of home equity line of credit in developing a long-term relationship with a member, 46% rated it very effective, awarding it 5 on a five-point scale. Another 35% rated it as a 4. In fact, Klewin notes he’s seen other studies revealing the number one product indicating a borrower’s primary financial institution is a home mortgage. A home equity loan is second. “If I were to look at that even further, if you start thinking of a home equity loan as a transactional account with a credit card attached or the ability to write checks off it, I think it will be even a stronger attachment than a first mortgage,” Klewin says. “A first mortgage may be sold off into the secondary market. A home equity loan will in all likelihood stay with the credit union.” Klewin notes the number of credit unions offering home equity loans has grown significantly, especially among larger credit unions. One factor he credits is the large number of baby boomer homeowners who have now spent some time in their house and compiled considerable equity. They’re attracted by the tax advantages of using a home equity loan for purchases such as cars. That’s the push behind the growth in home equity lending. At the same time, credit unions have discovered the loans offer relatively low delinquency and charge-offs as well as the opportunity to offer the member other products and services. Those members will have only one home equity loan, making them long-term members. That’s the pull. All very well, but there are some trends that bother Klewin. “Because of the fierce competition, we start seeing behavior (by credit unions) we might not otherwise see,” he says. “We start to see the creation of products such as interest-only so there’s no amortization going on. We occasionally see what I would call a demand home equity loan, where the member doesn’t have to pay anything until the point the credit union says it wants paid off in full. “You’ll see the credit union skipping documentation, for example not verifying employment. They may not take the steps they need to take to look at the income of a self-employed person. They may push down credit scores in order to write a home equity loan they might not otherwise make.” So what draws members to a specific financial institution’s home equity product? “The starting point for any discussion on a loan transaction with almost every member is going to be the rate,” Klewin replies. “A savvy consumer is going to go beyond rate and start looking at certain kinds of features.” For example, a member seeking to use their home equity loan as a transaction account with a credit card or checking attached will look for ease of access. But that member is still going to look at the rate and want to know they got a good deal – if not the best available, at least one that won’t embarrass them. Klewin expresses some concern about interest-only home equity loans, high loan-to-value loans, and speculative behavior with members using their loan to buy another house as an investment. From the credit union’s viewpoint, the old axiom that the three most important factors in real estate are location, location, location remains true, he continues. That applies even within small parts of a geographic area. Credit unions need to tap their local knowledge of specific neighborhoods. That creates a problem with certain lending tools, specifically automated valuation models, a credit union may be using. The software takes into account factors such as location, type of house and sales of similar properties, then spits out a valuation. It’s relatively inexpensive and objective. However, it doesn’t take into consideration one specific street may be more desirable than another. It also takes a human eyeball to discover the homeowner in question may be the most slovenly person on the block. The torn sofa and broken tricycle sitting on the front porch may not exactly add curb appeal, and the automated system may overstate the home’s value. “If you rely on something like that (automated system) as your only means of evaluation, you’re going to run into trouble very quickly,” Klewin warns. “I know regulators are very concerned about that. “The chief way to not get into trouble is to have a cold-eyed, prudent, well-run operation. Make sure you’ve got the right valuations, underwriting and documentation. There is no silver bullet. It’s just running a good operation that will keep the credit union out of the kinds of things I think keep the regulators up at night.” -