2015 marks a decade since the surge of boom-era home equity line of credit originations, and mortgage industry insiders forewarn that roughly $23 billion of these loans will have payment increases in the coming year alone as the interest-only phase ends. That number is projected to reach $56 billion by 2017.
As borrowers' end-of-draw periods approach, some may want to refinance into new credit lines to restart the interest-only payment cycle. Now is the time to identify how many of your HELOCs are due to reset over the next two years and look for ways to streamline solutions for these customers.
The federal financial institutions regulatory agencies, along with the Conference of State Bank Supervisors, issued guidelines to lenders on how to proactively work with at-risk borrowers, namely by:
- developing a clear picture of risk through portfolio analyses;
- contacting borrowers at least six to nine months before end-of-draw dates;
- offering well-designed and consistent programs for refinancing, renewal, workout and modification.
Meeting these expectations will be a challenge at best, so what can lenders do? Rest assured, you can get a jump on taking preventive and proactive measures against defaults in order to mitigate risk and retain portfolio assets. Here's how:
Analyze and organize your portfolio
Start by organizing loans in batches using criteria such as FICO scores, loan-to-value ratios, unpaid principal balances and reset dates. Next, look for additional connectors, including how many of these borrowers have their first mortgage, deposit accounts or unsecured debt relationships with your company. Remember to check on the lien position of each borrower's HELOC and consider how their circumstances (e.g., marital status) might have changed.
Prioritize solutions and offer up help
Time is of the essence in maintaining borrower connections before they seek help from another lender. Focus on retaining select clients as the HELOCs reset, and align products and services with risk levels for reduced costs. Create streamlined, expedited underwriting, title and valuation product selection and loan closing options.
There's no denying that this will require considerable time and effort by your team, which is why you might want to consider outsourcing. Beyond extending your reach, this is an opportunity to complement your strengths and fill in the gaps and aim to improve customer satisfaction and provide certainty in the lending experience.
Form a strategic alliance
Look for a third-party service provider to assist in your portfolio analysis, product ordering and fulfillment. Ideally, the vendor should have access to data and the analytics to enhance your own portfolio analysis. Besides providing automated scoring and supporting data for lien position and other encumbrances, the vendor should also be able to identify where your borrower and current property owner information does not match.
Another desirable offering is a customizable solution for an end-to-end home equity platform. If you can find a third-party who is experienced using existing lender technology and workflows, it will eliminate your need for new system integrations or data transmissions. You will be well on your way to seamless ordering and fulfillment of title, valuation, loan closing and recording products and services.
Finally, look for a vendor with a full loan review team that has the ability to scale if HELOC resets present capacity challenges for your company. You'll be much farther down the road to engagement success if you find a firm that already has dedicated program management, recruiters, trainers and internal quality assurance personnel in place and ready to work for you.
Remember, end-of-draw and HELOC resets don't need to cause headaches for your operations team, or create sleepless nights for risk management. You have much of the data necessary to assess portfolio retention and credit risk. Find the right partner to enhance your data, streamline your processes, and assist your company to get ahead of the opportunities headed your way.
What we've learned from the financial crisis of the mid-aughts is that we cannot underestimate the risk that mortgage payment shock poses. While not all borrowers will be at imminent risk of default, research shows that proactive management of the risk reduces default and helps the consumer.
Kevin Wall is president of Santa Ana, Calif.-based First American Mortgage Solutions.