Home equity loans are back in vogue. Property values have increased. Mortgage rates have inched up. Borrowers are seeing the home equity product once again as a viable option.
But let’s not forget the past. With the dramatic decrease in property values coupled with loose underwriting standards of the early 2000s, home equity portfolios met an ugly moment. These loans continue to place a strain on servicing operations. Home equity loans originated 10 years ago are undergoing rate adjustments and requiring re-payment. The potential for payment shock and default are real.
Home equity portfolios have become a focus of the Federal Deposit Insurance Corp (FDIC). At the beginning of the year, the FDIC released a bulletin addressed to borrowers alerting them to potential pitfalls of their home equity loan, particularly if it was due for an interest and payment adjustment as it came to the end of its draw period. They advised the borrower to contact their lender to explore refinancing or seek a loan modification. Further, in a bulletin to the banks, the FDIC cautioned them to take steps to review their home equity portfolio, identify loans or borrowers that may have trouble and to take proactive measures to avert problems before they arise.
Now is the time to review your servicing operations to determine whether you are meeting the needs of your current home equity customer base while ensuring that you meet the requirements of your new customers. How is your servicing set up? Are you relying on the first mortgagee to protect your interests through the escrowed payment of taxes and hazard insurance? It is extremely doubtful that they serviced their first mortgage loans with your interests at heart. Thus, how are you tracking these important items which can cause serious problems if left unchecked?
It is important that you address the special needs of the home equity portfolio and borrower.
- Does your current home equity servicing system have the capability to monitor the mortgage aspects of the loan? Can it provide escrow tracking routines, and even collect escrow if required?
- Have you established an on-going risk model of the portfolio using current loan level data as well as borrower and property information which will allow you to identify potential risks before they arise?
- Do you have a single point of contact strategy in place in the event of default or loan modification needs? Do you have loan modification models and options planned that will meet borrower needs?
- Do your underwriting criteria need to be changed to meet today’s environment?
- Do your closing requirements need to be amended to ensure that you are properly secured?
This is an excellent opportunity to examine your operations. Department expansion to meet increased loan requests on the front end and address expanding servicing requirements on the back end can be expensive. Take the time to review your internal policies and processes. Explore how outside resources can improve your delivery and enhance your bottom line. Any or all of these functions can be outsourced to a company that will partner with you to meet department and corporate objectives.
Home equity lending is back. It is important not to repeat the errors of the past but to create operations that best support the needs of the borrower and meet the requirements of the bank.