It’s Time to Take HELOCs Off the Backburner

Mortgage refinancing had quite a moment the last two years. Borrowers rushed to take advantage of the historically low interest rates, resulting in $5.5 trillion in mortgage lending in 2020 and 2021, according to Black Knight’s January 2022 Mortgage Monitor.

Enter 2022 … and the winds have completely changed. As the Federal Reserve rapidly adjusts interest rates upward, the housing market reacted with a sharp and abrupt drop in mortgage refinances. Weekly mortgage applications are down 83% compared to one year ago, according to the Mortgage Bankers Association.

Homeowners have record levels of home equity and still have financial needs. Where a cash- out refinance might have made sense last year, interest rates likely make a home equity loan a better financial decision.

HELOCs: Then Versus Now

I recall from my days as a credit union lending manager that HELOCs were often a “backburner” product. Mortgages, car loans and personal loans were almost always the first-line solutions. There were a few reasons why HELOCs weren’t a go-to pick – but, those same reasons aren’t true today. I’m happy to count the ways things have become very different, thanks in large part to automation technology.

Then: HELOCs were cumbersome for lenders.

Now: Processing and underwriting can be done with the click of a button.

Then: The ROI of HELOCs was lower than other types of loans.

Now: Automation drives efficiency, reducing manual touches per file and making it easier to scale the volume without more effort.

Then: Borrowers often didn’t ask for HELOCs.

Now: Borrowers know they are sitting on peak home values – and are constantly reminded by the regular influx of home equity offers.

Then (and also now): HELOCs didn’t put resources in borrowers’ hands quickly, taking weeks to process and close.

Now: Borrowers can get funds in as little as a week, with automation enabling a clear-to-close in a matter of days.

Simply put, in the current rising interest rate environment, HELOCs should be a go-to, game-changing lending product.

Changing Perspective: From Backburner to High Value Loan

HELOCs can be extended much more efficiently than in days past. In fact, you may be making them much harder than they need to be! Digitization, advanced technology and updated processes can make HELOCs surprisingly fast and simple. Capitalizing on this trifecta benefits the borrower and institution – here’s why.

Technology is changing the “return-on-effort” equation. Many institutions treat HELOCs like mortgage loans, and as such, follow the same, or very similar, loan process. For the amount of effort, many lenders see the return as “unrewarding,” when they could be extending other forms of credit more quickly and easily.

Home equity loans are actually quite different. They aren’t subject to the same requirements as mortgage loans, which opens the door to implementing a more streamlined process. Credit unions today have access to automated workflows capable of intelligently executing home equity loans quickly, consistently and accurately. With powerful technology working on their behalf, lenders’ perception of effort can quickly change from “unrewarding” to “almost too easy.”

HELOCs are a good choice for most borrowers today. Many homeowners are sitting on significant sums of home equity, but few want to refinance or take out a longer-term home equity loan at a higher interest rate. HELOCs are an important tool to have in your lending portfolio to help tap into those resource pools. HELOCs provide higher lines of credit at much lower rates than credit cards, which allows borrowers to only pay on what they use. And because it’s collateralized, it can be used more flexibly to address a broad array of needs.

Even those who need funds fast will find value in HELOCs. Thanks to the aforementioned automated workflow technology, a HELOC can be cleared to close in days, not weeks. With many institutions still requiring anywhere from 20 to 60 days, this is monumental progress. It’s a logical leap forward for community lenders that want to remain competitive against ultra-speedy, tech-first competitors, hungry to capture more of the financial services market.

HELOCs help diversify and mitigate risk in the portfolio. From my experience in credit union lending, I’ve seen how loan portfolios can become two-dimensional. Home and auto loans are the bread and butter of community lending institutions. However, the tandem rise of interest rates, prices of cars and homes have slowed demand significantly for these two cornerstone products.

Personal loans are another popular lending product, but they carry additional risks. Without collateral at stake, delinquency and default rates can creep higher. In addition to potential portfolio risk, collection efforts require valuable time and resources.

Home equity borrowers are more likely to repay their loans on time. This can provide lenders an appealing way to add diversification as the economy navigates the volatile market and meet the financial needs of their members and customers.

As the lending environment evolves, it’s important to change alongside your borrowers’ expectations and needs. Is your institution ready to quickly and conveniently offer the lending product more borrowers need today? With the assistance of technology that transforms, HELOCs are poised to be a game changer in 2022.

Scott Meier is a former credit union lending manager who oversees western region sales for LenderClose, a West Des Moines, Iowa-based CUSO that automates home equity lending processes at scale using business decisioning intelligence.