MISMO proposes working group to develop digital HELOC standardization

The mortgage industry trade group that develops technology-related guidelines plans to introduce a working group aimed at developing rules related to the digital closings of home equity lines of credit. 

The Mortgage Industry Standards Maintenance Organization issued a request last week for participants in a new development workgroup to help devise procedures for electronic HELOC originations. Based in Washington, D.C., MISMO is a subsidiary of the Mortgage Bankers Association.

"The new eHELOC DWG will collaborate with industry participants, government agencies and other stakeholders to complete the analysis to determine eHELOC standard feasibility and prepare a roadmap of artifacts that would be needed to standardize this across the digital mortgage ecosystem," MISMO President David Coleman said in a press release. 

The organization pointed out that the more streamlined process of closing a HELOC compared to a closed-end loan highlighted the importance of having uniformity in electronic closing documents. 

Without a primary investor and source of liquidity serving a role akin to the government-sponsored enterprises in the home loan market, no model set of forms yet exist in the eHELOC segment either, "allowing this MISMO workgroup the ability to step in to innovate and standardize."

Also, unlike mortgage and other closed-end eNotes, eHELOCs have more variations in the terms used within its promissory notes as non-negotiable documents, making a case for more standardization that might open up trading, according to the organization. 

"Standardizing these electronic closing documents would allow for increased interoperability of HELOCs – easing the onboarding process as the assets are sold/transferred between parties," MISMO said.

"Industry professionals who have an interest in — or experience with — developing electronic document standards are encouraged to join," Coleman said. Meetings are expected to be conducted regularly via conference call.

The new working group emerges as HELOC demand surged last year after higher interest rates removed nearly all incentive for homeowners to refinance. In the fourth quarter of 2022, HELOC originations increased almost 32% on an annual basis, according to real estate data provider Attom. In the same time frame, the number of refinances dwindled by 73%. 

HELOCs also accounted for 21% of home loans originated in the final three months of the year, compared to just 7% in the fourth quarter of 2021. 

Sharp declines in mortgage origination volumes in 2022 prompted several nonbanks, including loanDepot, Guaranteed Rate and Rocket Mortgage, to introduce HELOCs or other types of home equity loans, as they attempted to diversify offerings and retain clients. At the end of the year, Achieve Loans also offered a rare HELOC securitization of its originations. 

With several housing researchers now showing a growing number of homeowners opting to hold on to their existing properties instead of making a new purchase at higher mortgage rates, many are likely to tap into their home equity in order to renovate or make other improvements. According to new research published by Discover Home Loans, 79% of homeowners surveyed in January indicated a preference to renovate instead of moving into a new home.

The share was similar to the percentage from one year ago, but underlying reasons may have shifted in the ensuing 12 months. High home prices and limited supply were primary obstacles keeping many consumers from moving a year ago.

But current inflation and interest rate headwinds are also causing some readjustment to renovation plans as well. Approximately 44% of respondents in Discover's survey said expected renovation costs were coming in higher than expected, while 26% indicated they had cut back on the scope of their projects. 

Still, 14% said they planned to take out a new loan to cover the added cost. The nationwide survey of 1,500 homeowners was conducted by Dynata on behalf of Discover Home Loans in January.