Mortgage originations, whether new home purchases or refinances, have been booming over the last several months. The latest projections from Freddie Mac have $3.6 trillion for 2020, and 2021 is expected to produce $2.6 trillion. With all these purchases and refinances, why is now a good time to revisit your home equity program?
While rates are expected to remain constant over the next few months, we all know rates will go up at some point. When that occurs, mortgage originations will slow, and refinances should almost cease. There will be millions of homeowners with a mortgage at a historically low rate. In the event these homeowners need to tap their equity for college tuition, home improvements, or debt consolidation, a cash-out refinance would not be a wise choice. A much better option would be a home equity loan or line of credit. Now is the time to revisit your home equity programs to ensure you have a competitive product when this shift does occur.
How can you be sure your home equity product is competitive? Many financial institutions providing home equity products do so in a fairly cookie-cutter fashion. Draw periods and amortizations may differ, but most home equity loans look the same. One area you can differentiate your product, and be competitive, is the amount of equity you allow your customers to access.
Many programs today have a maximum combined loan-to-value (CLTV) of 80%. While this limit does build in a certain amount of risk management, it can leave your customer with little or no equity to access. In these situations, your customer may simply find another financial institution willing to lend more equity. As a result, you lose the loan, your customer, and potentially the overall relationship.
Your provider should understand the balancing act of trying to manage risk while at the same time trying to grow loan production and maintain the customer relationship. That is the driver behind our Protequity program. A credit default insurance product that covers home equity loans, home equity lines of credit, home improvement loans (both secured and unsecured), and purchase money seconds. This program provides the ability to lend up to 100% CLTV while giving peace of mind by eliminating the worry of borrower default. This allows you to manage risk, grow your loan portfolio, and maintain the customer relationship.
At times, certain lenders will ease their limitations and lend up to 90% CLTV or even 100% without transferring risk and utilizing credit default insurance. The typical pitfall to this strategy is the lender’s risk is usually defined to a limited geographic region while the insurance carrier is spreading the risk from coast-to-coast. Therefore, any regional downturns would have a much more severe impact on the lender as opposed to the insurance carrier. In 2008, some areas of the country experienced a dramatic drop in property values. Southern California, for example, saw a 35% decrease in home prices in one year. An uninsured 90% CLTV loan would quickly be in an underwater equity position in that situation.
As you are planning for 2021, take the time to look at your home equity program and your loan growth projections. Find a provider to help you manage your risk while at the same time growing and maintaining the customer relationship. To find out more about Protequity, click the image below to download our e-book or click here to get in touch.