Blog-Hybrid-Heloc

Why Lenders Should Switch to Hybrid HELOC Solutions

April 18, 2019

For a long time, home equity line of credit (HELOC) loans were the “go-to” short-term loan for homeowners, reaching a record high of $430 billion in 2006. With looser HELOC lending practices blamed for contributing to the 2008 housing crash, consumer confidence declined alongside the housing market.

Things are starting to turn around because, as house prices continue to steadily rise, home equity loans are becoming an attractive proposition for homeowners again. Additionally, homeowners are staying in their homes longer. In 2019, the typical American homeowner spent 13 years in their home, up from eight years in 2010.

Home equity reached a record high of $14.4 trillion in untapped loan potential in the fourth quarter of 2018, and 70 million homeowners were in a position to qualify for a home equity loan or line of credit, according to Bankrate. Bankrate’s research also suggested that homeowners were ready to start acting on this giant loan potential.

However, although the market is in a strong position, demand for home equity loans and HELOCs remains lower than in the pre-recession era. 

A combination of market forces, such as rising interest rates and new tax laws, means that homeowners are still wary of capitalizing on their home’s loan potential. Therefore, lenders need to find innovative ways to stay competitive and navigate this potential demand.

Accurate data is key to attracting new customers

The average interest rate on a home equity loan is 7.13 percent, whereas a homeowner on a 30-year traditional mortgage will pay 3.75 percent. Because HELOCs operate on a variable interest rate, rising interest rates are a dissuading determinant for homeowners who are looking to borrow against their home.

Additionally, new laws introduced in December 2017 say that interest on home equity debt can only be deducted if it is used to buy, build or improve the home rather than credit card debt or student loans, for example. And this write-off is limited to home loans up to $750,000, including the cost of the mortgage.

Because of this – and lingering memories from 2008 – borrowers are still wary of HELOC loans and will only go through with the offer if it closely matches expectations

Switching to a hybrid HELOC solution will enable originators to access timely and relevant information – namely, title insurance policies and appraisal reports – to help them close loans faster. This will give them a clear competitive advantage as homeowners start to capitalize on their loan potential. Understanding this key point has helped TD Bank to grow its hybrid HELOC product 33 percent.

Traditional loans are too rigid and slow for today’s market

Traditional title insurance policies require a comprehensive search and examination of county property records, tax records and individual name searches of vested owners before a commitment to insure can be issued. Moreover, traditional property appraisals require a licensed appraiser to coordinate with the homeowner for an on-site review of the property. The formal appraisal report is generally delivered days after the on-site visit. 

In today’s fast-moving loan cycle, lenders are facing increased competition and, thanks to market demands on small balance transactions, originators often have to absorb consumer closing costs. So, lenders need solutions that help speed up the underwriting process because keeping the closing time short means that lenders keep costs down.

What can originators do?

In cyclical markets, lenders don’t want to hold fixed costs. And moving toward consumer-facing and self-serve platforms is incredibly difficult due to the multiple product and service providers participating in the loan lifecycle. 

Altisource’s HELOC hybrid solution, HomeVal, a full suite of combined title and valuation services for HELOC lenders, is a cost-effective alternative to traditional title insurance policies and appraisal reports. It satisfies title, tax and valuation requirements by combining the Premium Title and Springhouse businesses into one easy-to-use platform for HELOC lenders. 

This means originators can underwrite loans faster, saving several hundreds of dollars per transaction. The valuation, depending on the location, can save days or even weeks compared to areas where there are usually one- to three-week turnaround times.

“Originators want to speed up the underwriting process on a HELOC loan and need to keep
closing costs well below traditional refinance and purchase transactions,” said Ben Hall, Vice
President, Product, Altisource.

In essence, HomeVal gives lenders an economic advantage if they require a more costly title insurance policy and full appraisal. It operates on three tiers of robustness, providing the flexibility that allows lenders to determine the level of title research they need to satisfy internal underwriting requirements.

Tier I: Express – Provides estimated value, confidence score, last sold price and date, assessed value and year, current owner and full legal description.
Tier II: Full – Provides all the features in Tier I, plus historical listing and sales information, sales comparable details, market analysis, property photographs and property taxes.
Tier III: Complete – Provides all the features in Tier II, plus manual review of comparable selections to ensure property characteristics are relevant to the subject valuation and a full report of monetary liens recorded after the first mortgage.

Lenders know that the future of HELOC loans is in constant flux with new technologies like blockchain starting to mature in the industry and government-sponsored enterprises (GSEs) continuing to revise valuations guidelines. 

Until an instant product solution integrated into the lender’s desktop underwriter is available, Altisource’s diverse product solutions help lenders navigate through product strategy quickly and effectively. Switching to a hybrid HELOC solution will certainly help lenders stay ahead of these changing markets.