Magazine article Mortgage Banking

The Equity Lending Boom

Magazine article Mortgage Banking

The Equity Lending Boom

Article excerpt

ACCORDING TO THE FEDERAL RESERVE Flow of Funds report in March of this year, outstanding home-equity loans amounted to more than $1 trillion in 2003. In fact, in terms of consumer loan portfolios, a study released in November by the Arlington, Virginia-based Consumer Bankers Association (CBA), 2004 Home Equity Loan Study, indicates that home-equity loans now represent 87 percent of outstanding consumer loan dollars.

Yet, despite these impressive statistics, the anticipated growth rate for equity products is still expected to outpace its current double-digit trend.

Homeownership is at an all-time high in the United States, making home-equity loans and home-equity lines of credit (HELOCs) an attractive resource for borrowers looking to leverage their equity and gain tax advantages. As outstanding dollars for other consumer loan products continue to decline, it is clear that borrowers are funding their large purchases, paying off debt, remodeling their homes and funding college for their kids with home-equity loans and lines of credit.

Today's dilemma

The flexibility that is inherent in equity lines and loans is appealing to borrowers, yet lenders should expect that as volumes grow, so will investor and regulatory scrutiny. Because HELOCs are secured by real property, just as first mortgages are, many of the characteristics of the loan are the same. In some cases, home-equity products are actually in first-lien position through 100 percent refinancing and consolidation loans.

Yet most home-equity loans and HELOCs are still serviced on a consumer servicing system. These systems were designed to handle automobile loans and credit-card debt, and do not have the inherent functionality to support issues like pre- and post-petition bankruptcy payments. But with the average home-equity loan for large institutions already up to $46,000 and growing, lenders that are reliant on consumer systems will face a significant range of issues and challenges as mortgage loan provisions move to the forefront.

For example, while automobiles are reasonably easy to repossess and credit cards can be written off, a defaulted HELOC could require a foreclosure for a lender to recover some part of its loss. Mortgage loan issues that could impact HELOCs--such as collections, bankruptcies, foreclosures, loss mitigation and reporting requirements--are all subject to regulatory provisions and easily managed on mortgage servicing systems. But even as plug-ins and add-on features are developed to enhance consumer systems, they can lack the compliance assurance needed in the mortgage environment.

The growth rate in home-equity product volume and balances has not only impacted risk, but the practice of just writing off unpaid HELOC balances will become less viable as these trends continue. Downward changes in property values or jolts to the economy could easily create a scenario in which lenders are scrambling to protect themselves by laying hold of the underlying property collateral. Yet to do so will require mortgage--not consumer banking--expertise.

Managing liquidity

Only about 20 percent of all home-equity loans and lines of credit are securitized, according to the Federal Reserve flow of funds report and Banc One Capital Markets Inc. That compares with 60 percent of mortgages in the first-mortgage market, according to Inside Mortgage Finance. That means there is currently more than $750 billion of home-equity loans and HELOCs still sitting on the balance sheets of financial institutions as asset loans. …

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