Look at the numbers:
- 20.6% increase in home equity lending year over year
- HELOC’s represent 15.4% of all mortgage lending nationwide
- Borrower equity increased by $1 trillion year over year
- Nationwide 1 million homes in positive equity
NCUA and Home Equity Lending
Home equity lending is an attractive product for many homeowners and lenders. The quality of these portfolios, however, is subject to increased risk if interest rates rise and home values decline. Sound underwriting practices and effective risk management systems* are essential to mitigate this risk.
Risk management systems: The two types of risks mentioned above are interest rate risk and home valuation risk.
Interest rate risk: I remember when credit unions were offering one rate for all. I disagreed with that logic back then and concur with the NCUA today. You must have a risk-based pricing model set for home equity lending in order to manage risk correctly. Additionally, your home equity loans should have a variable rate, so when your cost of funds increases your interest rate revenue will also increase.
Home valuation: This risk is what keeps management up late at night and poses the biggest risk to credit unions. Improper valuation and a drop in the housing market can lead to large losses. There is not much you can do about a drop in the housing market, but you can make sure you get a proper valuation. The NCUA does not require an appraisal on loans under $250K, but I would suggest that your risk management system would come under fire if you did a $200K home equity loan at 100% LTV, 650 credit score, using an auditors tax value. I have listed the most common valuation methods below:
- Auditors Value
- Old/new FNMA form 2055
- FNMA form 1004 full appraisal
I have discussed this with many different people at Credit Unions and have learned they dislike the first three because of the inaccuracy surrounding the home valuation. They also struggle with managing the cost of home equity lending and don’t like options 4 and 5 either. What do you do?
There is an alternative that is relatively new that was designed to solve this problem. The product is offered exclusively to Credit Unions by CU Appraisal Services. This one page report that is prepared by a licensed appraiser is called QSAR. This new report gives an accurate valuation but minimizes the cost traditionally associated with reports prepared by a licensed appraiser. Lastly, the NCUA feels that QSAR is an effective tool in managing risk.
Credit unions and home equity lending
I find that some Credit Unions embrace Home Equity Lending and have solid processes in place and others do not. As of 2Q 2014, NCUA Call Report Aggregate FPR indicate a 11% increase in home equity loans granted compared to 2Q 2013, even though there has been a 20.6% increase nationally. This data indicates that Credit Unions are underperforming the market and banks are besting them by nearly 10%.
What I think?
Historically, most people will pay for their homes before anything else. Therefore, a 1st mortgage or home equity loan is the best types of loan to have in a Credit Union loan portfolio. This puts the Credit Union in a great position of influence when it comes to collecting on the debt. Amongst all lending types, mortgage lending still poses the least amount of risk to a Credit Union.
Big or small, dealing with regulatory and compliance requirements can be a barrier for some Credit Unions, which is why there are third party vendors to assist them. One such vendor is CU Appraisal Services (CUAS), which works exclusively with Credit Unions to manage the appraisal process.
What should you do?
If you have not put together a strategy to capitalize on this incredible opportunity to better serve members with home equity loans, then you should get started today! Otherwise, you will continue to loose loans to rival banks. Implement effective risk management systems with risk based pricing and the use of QSAR With $1Trillion dollars in equity available and 1 million homes with equity to lend against, now is the time to ride the impeding wave of home equity loans!
Todd Campfield has nearly two decades of lending experience working on both the sales and operations side of the business. He held the vice president of lending and collections position with a credit union in Virginia that serviced the International Mission Board and had members all over the world. Todd relocated to Ohio in 2007, and began originating mortgage loans for community financial institutions, including a credit union based out of Cincinnati. He also worked for one of the largest mortgage companies in the country as an underwriter. Recently, Todd made the move to work for CU Appraisal Services as the partner relations manager. He has a unique set of skills with experience with originations, underwriting and managing the loan portfolio of a credit union.