Home equity lending has strong two-year runway ahead

The next 12-to-24 months will be a good time for the home equity lending market because of the conditions affecting the first lien business, experts say.

With elevated mortgage rates, the amount of equity homeowners hold right now and the relative shortage of inventory "it's a really lucrative environment for home equity, and has been for the last two years," said Allen Price, senior vice president, sales client and transaction management at BSI Financial Services. "We've got this jolt of lightning from a demand perspective, and the HELOC utilization has seen huge increases since Q4 of last year."

Price sees this continuing for the next two years, although he was reluctant to forecast a longer run. He was speaking as a panelist on second-lien lending at the Mortgage Bankers Association's Secondary & Capital Markets Conference.

In the long-term, "I don't think we're going to see anything that's really far deviating from what we're experiencing right now, other than maybe some improved rates," Price said.

What could disrupt the second-lien forecast

The two potential flies in the ointment are homeowners who are sitting on a record amount of debt and household savings rates that are at their lowest in two decades.

"Some of you home equity lenders look at that and [say] 'they might be taking out of home equity for the wrong reason,'" Price said.

But "given the current state of things, things are performing really well, and I think that puts a really nice, clear path for home equity to continue to grow in the next two years," he added.

The panelists were not concerned about underwriting standards slipping. For both first and second mortgages, those remain pretty tight, said Ken Flaherty, senior manager, retail lending at Curinos.

Product innovation in home equity lending

"Even some of the specialty products, like shared equity, the underwriting is thoughtful, so I think we'll be good there," Flaherty said. "But I do think…more broadly speaking, there's just a market demand for more innovation around consumer products as it relates to mortgages."

The shared equity product is a sign of this, he said. "It'll be interesting to see, from a performance perspective, over time for some of these products, what that looks like."

Why today is different than 20 years ago

Julian Grey, who leads mortgage data and analytics at Intercontinental Exchange's fixed income unit, emphasized that the housing market today is fundamentally different from 20 years ago, when home equity lending was later blamed as a factor in the financial crisis, largely due to the current shortage of housing inventory.

The market has "that solid collateral, which we simply didn't have in 2005, 2006," Grey continued. It could change in the future, "but for now, regardless of product type, the situation is completely different."

Lenders are also writing home equity products with combined loan-to-value ratios typically around 80%, with just a small handful willing to go up to 90%, Flaherty said. They are not the high CLTV products seen during the late-1990s through the mid-2000s.

What new entrants should consider

John Toohig, managing director at Raymond James & Associates, who moderated the panel, noted they are getting more and more calls about second-lien programs as lenders "are just dusting off" a product that has been "fairly dormant over the last 15 years."

For potential new entrants into the second-lien business, they need to "understand this market right now is a very different market from five years ago," Flaherty said. "The banks, depositories, own this market." Going back seven years ago they had virtually 100% share; they own about 75% of it now and that is because of the growth of the non-traditional products.

"Now, this is a very diverse market, this is a very hungry market now with investor appetite," Flaherty said. "So what you're entering into isn't just, let's stand up a product and the business will come; you've got 50 competitors that offer the same thing you do."

New entrants have to figure out how to be a differentiator in the home equity business, he continued. But some participants are big spenders on marketing, looking to get to the top of the consumer's inbox and winning those borrowers.

"You might be surprised on just how much some of these lenders are spending to get top of mailbox, and that's usually an eye opening moment when we have some of these conversations with clients of, how are you going to differentiate and how much are you willing to spend on marketing, because you're entering a very fragmented market," Flaherty said.

Why lenders need to consider second-lien products

An audience member during the session, Tom Davis, chief sales officer at Deephaven Mortgage, responded to a question regarding whether traditional retail loan officers are missing the boat with their reluctance to do home equity.

"If that originator doesn't call that borrower, the servicer is going to take that loan and that borrower and they're going to do the refi cash out," Davis said. "It's a great opportunity to pick up the phone and talk to the borrower [to] just get a pulse check before the servicer takes those deals."

Plaza Home Mortgage's wide ranging product menu already includes closed-end seconds, reverse mortgages and renovation loans, "pretty much everything other than HELOCs these days," said Mike Fontaine, chief operating officer and chief financial officer, during an interview at Secondary.

The company, which operates only in the correspondent and wholesale channel, has a program called FHA 100, which offers a simultaneous second.

The selling point is that the consumer wants to keep their low interest rate first, and they don't need the same level of proceeds they would get from a cash-out refinance.

"If you look at the blended rate or the blended payment it makes more sense than doing a full refinance or a cash-out refinance, although we see a lot of cash-out refinances as well," Fontaine said.

It is considering adding HELOCs and if so, it will be a product Plaza will sell to an aggregator.

To some of the points Davis raised during the panel session, it should be easy for Plaza's account executives to get up to speed.

"It shouldn't be a hard learning curve for them, [it's a] pretty simple program really," Fontaine noted. "There's some programs out there right now that are fairly straightforward."

The view on second-lien from the tech side

DocMagic provides not just document services, but also eClosing and eVault, among other mortgage technology offerings. It has started offering its services for HELOCS, company executives said during an interview at Secondary.

"That's the next logical step that we had to go to, and so we just closed the circuit with that," said Pat Theodora, CEO.

Additionally, "MERS now supports from registration perspective," said Brian Pannell, chief eServices executive, pointing out that competitor DART already offered this capability. (DART has ties with HELOC fintech Figure Technologies.)

Even though Fannie Mae and Freddie Mac don't buy them, aggregators and investors have been purchasing these products on the secondary market, which is "more of a reason to be one of the first to actually have a HELOC register with MERS," Pannell said.

"These types of things are pushed now with MERS, because they're seeing that in the channels, there seems to be more HELOCs coming up now versus purchase loans."