By Ray Birch
HUNT VALLEY, Md.—A number of credit unions are reporting robust activity in home equity secured loans after largely exiting the business as a result of the housing crash and the long crawl back.
Two credit unions, for instance, told CUToday.info they are seeing 12%-13% home equity growth, while another that discarded the loan a few years ago is bringing the product back. Other CU executives interviewed say they are once again seeing a big opportunity in home equity lending that’s worth special attention.
However, one CEO advised CUs to proceed with caution, as NCUA is watching this business closely, he said.
A number of analyses have been indicating that home repair needs put off by the recession are rising at a time loan rates are falling and home values are increasing—almost a perfect storm for home equity lending, sources say.
According to Harvard’s Joint Center for Housing, growth in home improvement and repair expenditures will reach 8% by the start of 2017, which is considerably above its 4.9% historical average. Data from Black Knight Financial Services show that during Q1, U.S. homeowners gained a collective $260 billion in additional home equity. An estimated 38 million borrowers now have at least 20% equity in their homes, the company reported.
CUNA Mutual Group’s latest Trends Report indicates that the demand for home equity credit will remain strong due to rising home prices, the improving job market, rising consumer confidence, consumers releasing pent-up demand for durable goods, and low interest rates.
“With the purchase market in full bloom, borrowing costs at historic lows and home values rising, it couldn’t be a better time for credit unions to be a real estate lender,” said Bernie McLaughlin, CEO at the $756-million Point Breeze CU here. “Home equity loans are one of the best loans a credit union can make in this economy because the loan is secured by the residence and home equity loan rates are adjustable—helping with any net long-term asset concerns you may be experiencing from fixed-rate mortgage portfolio growth.”
McLaughlin said that with rates so low and home values rising, plus the always valuable federal income tax deduction, more members are opting for home equity loans and lines to meet their lending needs.
“We believe the immediate future for home equity lending is very bright,” said McLaughlin. “Nationally, there is a refinance boom again, as the 10-year bond recently dropped to its lowest level ever. This also brings in new home equity loans, because many members often simultaneously open a home equity loan at the origination of a first mortgage. If you aren’t set up to streamline the opening of a home equity loan at your first mortgage loan closings, you need to change that to capture a great opportunity.”
McLaughlin said Point Breeze saw a home equity spike coming 18 months ago in its strategic planning, and it forecast a favorable mortgage and home equity environment.
“Our plans had us gear up our home equity capabilities by adding a new interest-only product, adding to our lending staff to handle the projected increase in volume and investing in our home equity marketing/communications—reaching out to our members and the market at large.”
Scott Wilson
As a result, Point Breeze’s home equity loans grew 11.5% in the first six months of 2016. Total loans grew by 13% last year.
“Our new home equity loan strategic plan initiatives were a big part of how and why we were able to do all that,” said McLaughlin.
One credit union sees enough opportunity in home equity to bring back a product it put on the shelf in 2013.
“That’s when we suspended our home equity line of credit program due to regulatory restraints and the costs associated to adhere to the Dodd-Frank Act,” said Becky Landis, CEO at the $62-million State Highway Patrol FCU in Columbus, Ohio. “We are seeing home prices increase and a decrease in homes currently for sale. The market is right to promote this product with rates remaining low.”
Landis added that the credit union has been seeing the most requests for home equity coming from members needing to make home renovations.
“We have revamped our HELOC program and will be offering it again to our membership in August,” said Landis.
While it never moved to eliminate its home equity product offerings, the $512-million SeaComm FCU in Massena, N.Y. now sees the need to step up HELOC promotion.
“We have put together a promotion to encourage our members to talk with a mortgage representative in hopes that we can cross sell them on a HELOC,” explained CEO Scott Wilson, who said the competition for home equity is increasing.
Wilson reminded that home equity lending is cyclical.
“We saw this increase, as everyone knows, before the recession. Then there was the drop-off in home values,” said Wilson. “Home values now have bounced back giving members equity they can tap into, and with the low-rate environment it is even more enticing. They are taking advantage of that.”
Greg Smith, CEO at the $4.6-billion Pennsylvania State Employees CU in Harrisburg, Penn., said recession lessons should have been learned by all lenders.
“We don’t lend to the 100% LTV, but will go as high as 90%. I can’t imagine anyone wanting to go back to the days of 100% or more LTV’s,” said Smith.
Greg Smith, PSECU
PSECU is not running any home equity specials.
“But we continue to see strong growth in HELOC’s, about 13% annually, and negative growth, about 8%, in our fixed equity products (five and 10 years),” said Smith. “Those fixed products have slightly higher rates, about 50 basis points, than the HELOC, which is variable based on prime.”
In Cincinnati, General Electric is advertising a 2.99% introductory rate for a ten-year HELC that’s good through June 30, 2017. The $2.4-billion CU is also waiving closing costs.
Bob Steensma, CEO of the $370-millon Five Star Credit Union in Dothan, Ala., cautioned CUs on aggressively seeking HELOC business, noting that NCUA examiners are focused on this business.
“I know that the NCUA is keyed up on this issue that credit unions may be aggressively going after home equity loan business this year,” said Steensma. “They pulled about 25 of our home equity loans to review during our exam earlier this year even though it is such a small portion of our portfolio. I can’t remember their interest in home equity being this great during the last five to seven years.”
Steensma explained that Five Star’s interest in home equity lending has been limited due to difficulty in determining home values in rural areas, which make up a big part of its footprint.
“Our entire home equity portfolio only comprises 1.3% of our overall loan portfolio,” said Steensma. “Being located in rural areas, a significant portion of the homes we finance for members don’t fit into a conventional loan category as they often have acreage associated with them and many times contain additional structures on the same property. Because of this, the automated valuation tools that are used by financial institutions, especially in the home equity lending arena, do not work well in most of our areas. For us to get an accurate value, most of the time we need a full appraisal, which is costly for a home equity loan and takes time to secure.”