HELOCs Better Suited For Servicing Platforms
Mortgage lenders and servicers have an insatiable appetite for two things: risk minimization and cost reduction. While this may sound like an oversimplification, it is certainly true that financial institutions are laser-focused on these two critical areas of performance. Their ability to compete, invest and thrive is largely dependent on how successfully they manage their risk and contain their cost of operations. Both are impacted by the way home-equity line of credit products are serviced.
HELOC products have traditionally been serviced on consumer-lending platforms, and the original decision to do so was probably made because these loans have features similar to personal unsecured and credit card loans. Especially in the early days of HELOC loans, when the available line of credit was typically 10% or less of LTV (loan-to-value), risk remained relatively low and reliance was on character and not collateral. In the case of default, lenders simply wrote off their losses and later, hopefully, recovered some or all of their losses.
But there are several key factors in the mortgage industry that are driving the decision to transition HELOC loans from consumer servicing platforms to mortgage servicing platforms. These factors stem from the rapidly changing HELOC market and growing level of risk associated with these loans, the desire to attract a wider range of investors, and the pervasive need for lenders to reduce non-value added overhead.
The Changing Market
One of the most obvious changes in HELOC products is that consumers are paying down their first mortgages and increasing their home equity lines of credit. HELOCS are not only growing in terms of the amount (now averaging $46,000 for larger institutions), but they have also grown in terms of percent of LTV. In fact, in some cases they are as high as 110% of the value of the underlying collateral. Further, the refinanced HELOC has become the loan of choice for many lenders and borrowers alike due to its ease and flexibility vs. the traditional mortgage loan. As a result, many HELOC lenders are being challenged to provide the customary escrow services to which mortgage borrowers have become accustomed.
This has significant implications for financial institutions. First, writing off defaulted loans is much less viable as the average level of loan debt grows. Yet, a consumer debt operation is ill-prepared to navigate efficiently through mortgage default collections, bankruptcy, foreclosure, loss mitigation and credit bureau and regulatory reporting requirements while using a consumer loan servicing system. While consumer-oriented employees and their supporting technology may be able to struggle through this process, it is very likely it will be a more costly, time intensive process than is necessary, and will produce less than optimal results.
Secondly, this trend is expected to grow. Seniors are now tapping into their equity in greater numbers than ever before, and as the portfolios of financial institutions become more skewed toward HELOC products, regulatory scrutiny of these instruments is likely to grow as well. That means increased analysis and calculations to meet reporting requirements, and internal safeguards to protect the financial interests of the institution and its customers.
Attracting New Investors
As HELOC loans grow as a percent of assets, lenders will become more interested in packaging short-term and adjustable-rate HELOC products into pools for securitization, instead of lumping them together with car loans and credit cards. The ability to attract new investment markets can be improved by using a servicing system that offers the features and safeguards most familiar to both asset-backed securities markets and mortgage-backed securities markets. Mortgage servicing systems have feature and functionality elements specifically designed to meet regulatory and investor requirements within their core platforms, HELOCs are better suited for servicing on these systems along with other loans collateralized by real estate property.
Reducing Non-Value Added Overhead
Finally, most lenders are taking steps to reduce the number of platforms they are using, not only to streamline operations, but to take advantage of the associated reductions in costs. The ability to service all loan types from one servicing system is tremendously attractive, for a number of reasons.
First, operating costs are reduced simply by eliminating the ongoing maintenance, upgrading, programming, trouble-shooting and training costs associated with multiple systems. Duplicative technology is not only unnecessary, but it can become a barrier to implementing more effective operating strategies.
Secondly, servicing all customer loans on one system allows a more cohesive view of the customer. Cross-selling opportunities are easier to identify and customer retention strategies become more targeted and effective.
Changing Our Mindset
Moving HELOC loans to a mortgage servicing system makes inherent sense, but changing our mindset takes time. Yet, the mortgage industry is rapidly destroying old paradigms on nearly every front, and getting better and faster at doing so. Many institutions are already well along the path to single servicing platforms.
Customers, investors and shareholders will all be better served as a result.
Mr. Scheuble is chief information officer at a unit of Fidelity National Financial.
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