The Marriage Of Equity And Efficiency In Servicing HELOCs

Many Americans are feeling the effects of sustained inflation today – at the grocery store, the gas pumps, and beyond. In an economy that has seen an average price increase of common goods and services of 20% post-pandemic and unemployment remaining low at 4%, consumers are battling with balancing savings and spending. High ticket items, such as vehicles and air travel, continue to outpace inflation, yet many Americans are not letting that stop them from spending, especially through eCommerce channels.

What do these statistics mean for mortgage lenders and why should they be paying attention to consumer spending patterns?

The answer is simple – the housing market is entering a third consecutive year of rising interest rates and historically low home inventory, yet most American homeowners are sitting on untapped equity that could help them weather the inflation storm. Homeowners can access the equity of their home without refinancing their first mortgage by obtaining a “Home Equity Line of Credit”, or “HELOC”. Much like a traditional line of credit, consumers can draw from the equity of their home to pay for those high-ticket items, often at more favorable terms.

Looking under the hood, there is an estimated $16 trillion in tappable home equity across a homeowner pool of over 80 million with access to an average of $193,000 in equity. With this much equity, it’s easy to see why HELOCs have become a popular financial tool for achieving various goals, from renovations to debt consolidation. 

Yet many lenders (and by extension, loan servicers) opt not to venture into the HELOC market for legitimate, if often misguided, reasons.

To Offer HELOCs or Not?

To understand why lenders and servicers may not want to offer HELOCs, it is important to highlight how HELOCs are different from other mortgage instruments, and how the differences can expose the parties to increased risk. From payment calculations to regulatory compliance considerations, HELOCs are a different animal, and due diligence is needed before lenders and servicers enter this nuanced market.

Challenges for Lenders:

1. Variable Interest Rates:
2. Managing the recalculations of payments due to rate changes can be complex and requires up-to-date systems.
3. Lenders must notify homeowners of rate changes and adjusted payments, which requires robust communication channels. As most HELOCs are tied to Prime[1], lenders had to notify homeowners of rate changes 11 times since March 2022, with all those changes occurring within a 15-month period.
4. Payment Shock:
5. Homeowners may face significantly higher payments when transitioning from the interest-only phase to the repayment phase. Managing these transitions and ensuring homeowners are prepared can be challenging.
6. Monitoring and Managing Draws:
7. Lenders need to continuously monitor the outstanding balance, additional draws, and repayments, which can vary frequently.
8. Systems must be capable of recalculating payments every time there’s a change in the balance or interest rate.
9. Regulatory Compliance:
10. Lenders must comply with various federal and state regulations concerning lending practices, disclosures, and rate adjustments. Keeping up with regulatory changes and ensuring compliance adds complexity.
11. Risk Management:
12. Assessing the risk of default is more complex with HELOCs due to the changing balance and potential for increased payments.
13. Since most HELOCs are junior liens, lenders who own them will be less likely to be made whole in the event of default.
14. If the property value declines, homeowners could end up owing more than what their home is worth since they are likely borrowing more with the addition of the HELOC, increasing the risk of default.
15. Lenders must have strategies in place to mitigate these, and many other risks.

In essence, the nature of HELOCs — with their variable rates, flexible draw and repayment terms, and dual-phase payment structures — makes managing these loans quite complex for lenders, requiring sophisticated systems and diligent oversight.

Demystifying Subservicing in the HELOC Space

In an environment rich with data and emerging technology, it is critical for lenders to stay in touch with the needs of their customers, and nowhere is that truer than in the administration of loans. There is a misconception that when the loan closes, the lender’s job is over, when it is the opposite, especially for lenders who choose to retain the servicing relationship or who are working with a subservicer that provides a white-label service.

One could even argue that a sound servicing relationship for HELOC customers is even more critical, as these customers need more than the average first mortgage customer. Not only do these customers need the ability to make payments, access their accounts online, and reach customer service when questions arise, but they also need to be able to quickly access the equity of their home through the draw process.

Consumers need the education that comes with drawing funds, and how borrowing against their HELOC will affect their payment, the amount of interest they are paying, and the overall resolution of that loan when they enter the full repayment period. They also need to understand that the variable rate feature of their loan could affect their future payments.

Looking at the HELOC administration process this way, it may be easy to see why many lenders decide to just avoid the perceived burden of administering HELOCs altogether by not offering them at all.

But what if lenders could offer a valuable, profitable product without taking on the costs and risks of servicing them in-house? This solution is available today, albeit by only a handful of servicers who have the tools and expertise to bridge the gap between the lender and borrower through a subservicing relationship. When vetting a subservicing partner, lenders need to keep the following aspects of HELOC servicing in mind:

• Loan Administration – A customer call center, self-serve web/ mobile accounts, and omnichannel communications to handle customer transactions and inquiries.
• Default Administration – Loss mitigation, collections, and foreclosure management to include resolution funnel reporting.
• Business Administration – Quality control and assurance, performance metrics, servicing KPIs.
• Compliance – Strict verification that all federal, state, local, and investor regulations are being followed.
• Fraud & Risk – Robust risk mitigation strategies and fraud controls to ensure your HELOC program’s financial health remains strong.
• HELOC Veterans – Experienced servicing operators with specialized HELOC expertise and dedicated teams are best practice.

It’s highly recommended to partner with a servicer that has a dedicated HELOC team experienced in servicing the nuances of the special loan product. This team should know exactly what is required within the HELOC framework, including disbursement management, calculation accuracy, setup, and communications.

When subservicing is the core competency, the capabilities offered are designed to fully support the lenders’ portfolio management strategies and allow them enhanced flexibility and operational efficiency. Not only should the team be adept at the above HELOC servicing requirements, but they will also be able to assist with onboarding new customers, providing investor reporting, managing regulatory change, handling audit calendars, analyzing performance results, and more.

Comparing Apples to Oranges in Today’s Servicing Market

With mortgage market share shrinking and margins contracting, it is no surprise that an organization’s bottom line is of critical importance to lenders, and on the surface, it would seem as if retaining servicing in-house would save them money over time, but that is simply not the case, especially when taking HELOC administration into account.

When determining the right course of action, lenders need to look beyond cost and analyze the entire picture – customer service, access to top-notch technology, subject matter expertise in the areas of draws, risk mitigation, and fraud controls. When the costs of maintaining these areas of administration are considered, it is not only the most cost-effective to partner with a subservicer, but it is also safer.

Too many times lenders face a regulator without an answer as to why a process was managed a certain way or why borrowers weren’t properly notified of a change to the terms of their HELOCs. Will a lender be able to battle potential draw fraud without having the support of trained experts who are well-versed in identifying the potential fraud red flags? The cost of not being prepared is far greater than paying a subservicer to help manage your HELOC portfolio.

Another area to consider when making this decision is whether you have the internal tools to stay on top of changes in technology and borrower habits. More homeowners are demanding instant access to their equity, and do not want to have to make a manual request to engage in a HELOC draw. Subservicers like LoanCare® are at the forefront of technology and backed by decades of experience in harnessing data analytics. They can continually advance the customer experience to meet evolving consumer expectations and empower servicing stakeholders, no matter the role or function, to make faster, more confident decisions through on-demand data analysis.

Competing business models can also be a factor in a lender’s decision to service HELOCs, or other residential loan products, in-house or outsourced. LoanCare, for example, is not a bank or originator competing for a lender’s customer base. On the contrary, as a subservicer they are 100% invested in their clients’ customer retention and have built marketing tools and services to help clients engage their customers through communications, product offers, and financial programming for years following mortgage origination. They are in a unique position to help clients build awareness and drive demand for HELOC and other special loan products.

Conclusion

HELOCs are a unique and nuanced product. In today’s market, their popularity is increasing due to higher interest rates and equity opportunities. With the right partnership and game plan, lenders can add this valuable product to their portfolio without worrying about mitigating the inherent risk of servicing them.

By partnering with the right subservicer, lenders gain access to comprehensive HELOC servicing solutions that address the unique qualities of these products. It’s important to look for a subservicer that has been servicing mortgage loans and HELOCs for many years and is versed in a variety of features such as open-ended, fully amortized, interest-only, and segmented options to give you the highest degree of flexibility to tailor your offerings and scale your portfolio.

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[1] The prime rate is an interest rate determined by individual banks. Often used as a reference rate for many types of loans such as credit card or small business loans, “prime” or “base” rates, are closely tied to the target level of the federal funds rate established by the Federal Open Market Committee, although the Federal Reserve has no direct role in setting the prime rate. Learn more: https://www.federalreserve.gov/faqs/credit_12846.htm