How is your organization bracing itself for the influx of home equity lending?
These aren't the best of times ... rates are increasing, business is dwindling, and regulatory implementation is on everyone's minds. Tomorrow's residential mortgage market will be more difficult and more competitive. We here at Spillane Consulting are wondering whether we'll see our clients add new product lines to drum up some business, e.g. indirect auto. or home equity?
The residential mortgage market in a downturn, you might find yourself worrying about having no work for 20 mortgage employees (who, by the way, you hired at premium salaries during the past "boom" years), and if you're a financial institution, you might also be worrying about a sub-60% asset-to-loan ratio (unless you have a lot of MBS). Wouldn't it be nice to put those employees (and that money!) back to work? Are you considering adding any new product lines? Lately, we've been asked for help adding numerous new (for that institution) product lines including indirect auto., home equity, and programs directed at rental properties (generally exempt from the ATR/QM regulations).
Indirect Auto Lending
An indirect auto. product might be an effective way to put your assets to work, but obviously it cycles through much more quickly than mortgages ... you'll want to develop relationships and systems capable of maintaining that level of production.
Rental Properties Held for Investment
A product for financing the purchase or renovation of rental properties held for investment purposes may also be an attractive option ... specifically because this appears to be an under-served market and you'll also often be able to avoid the ATR/QM rules.
Home Equity Lending
But lets' discuss home equity lending in a little more detail.
With rising rates, and with so many consumers locked in at previous historically low rates, we hope no one is relying too heavily on a dramatic increase in refinance business in the next few years. Joe Borrower will not want to refinance next year at 6% when he's currently locked in at 3%. However, with home prices rising, people will seek to pull equity out of their homes through home equity loans and / or lines of credit. Look for Joe Borrower to show up at the branch when his car needs repair; he wants to build a garage; or he wants to pay for his son's college education.
Home equity lending is always competitive. With strong profit margins and high credit scores, these are great portfolio loans. But expect competition to be even more fierce due to the drop- off the mortgage industry is currently experiencing.
The key to being competitive in home equity lending is speed. Joe Borrower needs the loan to fix his garage yesterday ... and he's likely to go somewhere else if told it will take two weeks to process the loan. What makes this a problem is that home equity lending will not be business as usual ... the ATR/QM regulations will force changes to policies, processes, and procedures that threaten to slow down loan closing dramatically (although HELOCs are generally exempt, closed-end home equity loans are not). SCA's Steve Venti points out that it will be like "trying to ride a car with the brakes on" unless lenders are prepared for these changes. We recommend getting ready beforehand, rather than--as Steve also likes to say--"trying to tune the car up while driving it."
Prior to the new regulations, many of the requirements for home equity products were relaxed simply because the loans were quality and intended to be held in portfolio--there was no need for official verification of income or underwriting to industry guidelines. This will change now with home equity loans. Not only does the ATR rule require specific documentation and verification requirements, many lenders will want the added security of originating these as "qualified mortgages." This will mean meeting QM requirements, and often meeting Fannie or Freddie credit/underwriting requirements (due to anticipated importance of the GSE-eligible version of QM).
How will you handle these changes to maximize your home equity lending opportunities? We recommend training your consumer lending personnel on the more robust guidelines that will apply to home equity lending. Not only will this mitigate ATR risk, it will also help you maintain speed and efficiency in order to stay competitive in home equity lending. What do you think about automatic approval of borrowers for home equity lending when they refinance and have sufficient equity in the home? Could this dramatically decrease the necessary work to process the home equity loan/line and possibly allow you to deliver borrowers the speed they expect? If you're not doing so already, you may also "squeeze some more speed" out of your home equity lending process by allowing home equity lending to be handled at the branch level, rather than centralizing the process--a borrower walks into a bank, and the branch manager says, "Yes, ma'am, if you have a seat we can take care of this right now," versus, "Well, ma'am, if you fill out this paperwork I will submit it for processing/approval by the main office-- when are you able to come back in?"
What else can you do to get some speed out of your home equity programs? Any thoughts on automated valuation models, i.e. computer-generated home appraisals?
Feel free to reach out if would like to discuss whether partnering with us to create/improve/audit one of these programs makes sense for you.
We'd like to share with you another lesson from Dan Sullivan's "How the Best Get Better: The Art and Science of Entrepreneurial Success." In the following excerpt, he discusses how leader's reach a "ceiling of complexity" in their lives above which they fail to grow.
The problem is experience. Within each stage, we gain experience by solving problems and transacting business. However, this experience has a price--each solved problem, every transaction, adds complexity to our lives. At a certain point, the growth of complexity prevents any further growth of capability, performance, or achievement.
A new state of simplicity is required. No further progress is possible because the existing stage of growth is filled with the complexity of experiences--the messes, stuff, details, complications, conflicts, and contradictions that come from doing things a certain way for a long time. One thing immediately becomes clear: Working harder and longer in the existing stage no long works; in fact, it becomes counterproductive.
A new set of goals is required. New goals--higher and more demanding goals--automatically force us to develop new relationships, structures, and habits. New relationships will provide us with larger opportunities and better results. New organizational structures will provide us with the support necessary to obtain larger opportunities and better results. New personal habits will enable us to obtain higher levels of performance and achievement. All of this means that our current state of complexity must be left behind. When we we choose the future over the past, we enter a new stage of individual growth. We break through the ceiling [of complexity.]
Our industry is always changing in one way or another. This year, regulatory changes dominate our thoughts and discussions. Next year, it will be something else (hopefully). Either way, success will require adapting to these changes and making the most out of them.
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**These are our opinions. We're not authorized, or willing, to express those of others.**