If you’ve been following my articles over the last two years, you will know I have agreed with most experts that interest rates would rise at some point in 2020 or 2021. Well, it may not be 2020 or 2021, but to quote a famous line from the 1982 movie Poltergeist, “They’re here.”
Yes, interest rates have risen and are now residing in the 5% range. While activity still remains in the purchase arena, refinance transactions have taken a serious hit. What’s a loan officer to do? Now’s the time to shift gears and focus on your home equity products.
Over the last few years, if your customer needed cash for reasons such as debt consolidation, home improvements, or college tuition, the go-to product was likely a cash-out refinance. Now that rates have risen, using the equity in a home through a home equity product makes much more sense.
Of course, home equity loans, whether fully amortizing or a line of credit, are not immune to rising interest rates either. Greg McBride, Bankrate’s Chief Financial Analyst, predicts home equity rates to be in the 6.25% range by year-end 2022.
Still, it is more feasible to finance a home improvement loan through a home equity product than refinancing a first mortgage that may have an interest rate below 3%.
While many lenders have embraced home equity lending, many others tend to frown upon these transactions since the average loan size is significantly lower than your typical first mortgage or commercial transaction. In my opinion, this is shortsighted, especially considering the large increase in appraised home value we have experienced recently.
Home equity products should be a staple of every retail deposit institution’s consumer strategy. These transactions are great opportunities to cross-sell other retail products and services, such as /sharedraft accounts, savings accounts, CDs, etc. The typical home equity borrower usually has 4-5 other additional services with their lender. If you lose the home equity loan; you could lose the entire relationship. Conversely, if you originate the home equity loan, you have the opportunity to pull through additional products to strengthen your relationship.
Stand Out from the Competition
Now that I’ve convinced everyone to jump into the home equity market, how can you rise above your competition? One area of focus should be your speed to close. Make sure you have the latest solutions for your valuation and title requirements. These can reduce the time and expenses involved in your home equity closings.
Also, consider increasing your maximum combined loan-to-value (CLTV) limit. Will this increase your risk? Yes. But let’s face it, there is still risk involved even with lower CLTV lending. Fluctuating home prices, and fees related to protecting your interest in the event of a default, are just a few factors that can quickly erode the remaining equity in the home you had hoped would offset some of the performance risk. Protequity, Unitas’ credit default insurance program, is a great tool to insure your home equity portfolio against default, regardless of CLTV.
What are you waiting for? Now’s the time to get active in the home equity market. Be proactive, get creative, make sure you have competitive products, and evaluate the option to transfer performance risk off your balance sheet with a credit default insurance program also known as protequity. Let us know how we can help.