You are most likely familiar with HELOCs (home equity lines of credit), but let’s briefly go over what they are, and how they pertain to both lenders and borrowers before we discuss challenges surrounding them. HELOCs are a line of credit, that provide homeowners the option to borrow money against their home. Today, HELOCs are typically only approved for borrowers with excellent credit, as being too loose with the customer qualifications got the mortgage industry into some hot water during the mid-2000s.
Many people view HELOCs as a backup plan, allowing them to pull from the line of credit for anything from unexpected maintenance repairs and home improvements to medical expenses. HELOCs require that a borrower use their most valuable asset—most likely their home—as collateral for the loan. This means that, in the event a borrower cannot pay back their debt, they are at risk of losing their home.
Lender challenges with HELOCs
According to research conducted by the Mortgage Bankers Association, HELOC volume has increased 22 percent since 2010, to $56 billion. Though that’s a large increase, compared to the number of HELOCs that were issued at their peak in 2004 and 2005, this number is down 70 percent. When looking at these numbers, specifically, it is once again important to remember that HELOCs were being approved at an alarming rate back in the early 2000s, which did not end well for the mortgage industry. Today banks and credit unions are carefully getting back into the HELOC game, but with stricter guidelines and policies than in the past.
With the above points in mind, it is easy to see why there are numerous lender challenges with HELOCs. Not only have the needs of consumers changed, requiring lenders to adjust accordingly, but they also must factor in technological advancements. One of the biggest lender challenges with HELOCs concerns the tracking process. While HELOCs are typically monitored the same as first mortgages, they are not tracked as often, which can cause problems. If the HELOC is not properly monitored and tracked internally, the borrower may be at risk of losing their home if they default. If the borrower defaults, the lender won’t get their debt repaid either, which is a lose-lose for all parties.
This is why it is so important that banks and credit unions ensure their HELOCs are adequately tracked. For many institutions, this means outsourcing this service. By bringing in a knowledgeable third-party who has the tools, resources, and experience to track HELOCs on a regular basis, lenders will no longer have to worry about their borrowers becoming delinquent.
Another lender challenge with HELOCs has to do with the current nature of home equity lending and the fact that borrowers want convenient access to loan information, all the time. Thanks to technology, consumers are used to being able to look up the answer to something in that moment, and this is no different for home loans and HELOCs. This can sometimes be a burden for financial institutions who do not have that technological capability to meet their customers’ demands. By outsourcing HELOC monitoring to a third-party vendor, your borrowers will be afforded this luxury, especially if you go with a vendor that focuses on excellent customer service and real-time data.
HELOCs are a very important part of the mortgage industry, especially given the fact they are making a resurgence. In order to keep borrowers happy (and prevent them from becoming delinquent) it is important that financial institutions recognize the various lender challenges with HELOCs and adjust accordingly. For more information on this subject, be sure and download our latest ebook, Why You Should Consider Tracking HELOCs and How to Streamline the Process.