Imagine Kristin and Michael, a fictional couple in their mid-50s who live in an affluent suburb. They’ve paid off their mortgage and are enjoying their lifestyle as empty nesters. Although they had planned to downsize from a 4,000-square-foot home to a smaller-sized condominium, they’ve decided to add on a first-floor master suite instead. This will give them the flexibility to either age in place or sell their home at a higher price later.
Now come the financing decisions: The husband and wife are not sure whether to take out a second mortgage or a home equity line of credit (HELOC). The couple have no loyalty to their original mortgage banker. Whom should they approach for guidance on the right product?
Second mortgages and HELOCS are not simply products. These are strategic instruments to help individuals continue to expand their wealth and/or to compensate for other market developments.
Kristin’s and Michael’s story resonates with real-life homeowners as inflation and higher interest rates are causing many buyers and sellers to withdraw from the housing market. Indeed, the National Association of Realtors expects the number of existing-home sales to decrease 13% this year from 2021
. At the same time, the amount of equity in U.S. homes reached a record $27.8 trillion during first-quarter 2022, according to the Federal Reserve.
This opens the door for mortgage lenders and originators to connect with clients in a new way. If borrowers aren’t moving to a new home, they may be looking to tap their home equity through a second mortgage or a HELOC for a variety of life’s expenses.
Reaching these borrowers requires a sophisticated set of approaches, for several reasons. First, it’s necessary to have a deep understanding of where these borrowers are in their lives.
Second mortgages and HELOCS are not simply products. These are strategic instruments to help individuals continue to expand their wealth and/or to compensate for other market developments — such as the rise in short-term interest rates, which will greatly impact consumers with credit cards and other types of debts.
As personal finance and mortgage lending continue to converge, the products, services and strategies advisers suggest must be customized according to individual needs, goals and financial situations. That makes providing the right second mortgage or HELOC an increasingly complex process. Underwriting requirements for mortgage products and risk tolerances also can vary widely.
Most importantly, lenders and the originators who work with them have an opportunity to leverage second mortgages and HELOCs as part of a longer-term growth strategy. But how do they start?
The many uses for second mortgages and HELOCs go beyond home improvement (such as paying down personal debt) and are moving mortgage lenders into a different role — that of trusted financial partners for borrowers at every stage of life’s journey. In many cases, however, it should not be assumed that consumers will automatically turn to the institution that gave them their first mortgage for other types of loans.
If borrowers do approach them for other products, the experience that lenders provide must start off exceptionally well. Many banks that offer auto loans have mastered this by qualifying individuals seamlessly within minutes.
The mortgage lenders that want to successfully diversify must be equally responsive, even with all the frictions that are inherent to home equity lending, from title and appraisal to closing and post-closing. How can they do so while making money from day one?
Lenders should begin by analyzing which segments of the market they should be targeting. Should they hone in solely on private wealth clients, for example, or consider marketing to general depositors? What range of loan sizes will they want to provide to these prospects? What geographies should they concentrate on? The answers may differ depending on:
The nature of their institution. Independent mortgage banks, for example, may not be as comfortable as larger lenders with variable-rate products. Moreover, they may not have as broad of a prospect group, with strong built-in relationships on which to capitalize.
The makeup of their current loan portfolio and the consistency of the strategy underlying it.
The ultimate destination for new loans. Even when lenders plan to hold them in their portfolio, they should build in secondary market requirements and consider best execution approaches for additional future capital-markets flexibility.
Other considerations, such as internal talent management. A new or expanded home equity lending strategy could enable a company to transition some team members from declining refinance departments, for example, directly into this new area — streamlining migration to a new source of income.
Today’s lenders also will want to be conscious of home equity lessons from the past. If they’ve found that in previous years, the HELOCs they’ve offered have been underutilized, it’s time to rethink their mix relative to second mortgages. Otherwise, the production costs of putting them on the books could be overwhelming. Thankfully, there are new ways to finely tune operations to make both HELOCs and second mortgages profitable for lenders.
A precisely crafted approach to these operations can give lenders and the originators who work with them a service advantage — helping them to attract and retain more borrowers while maximizing their margins, too. Technology is fundamental to these outcomes.
There are many options that support a predictably excellent borrower experience while empowering lenders to allocate exactly the right amount of time and resources (no more, no less). Lenders are well served to review all of the tools available to handle processing requirements as efficiently as possible, loan by loan.
For example, depending on the individual second mortgage or HELOC, a lender’s product needs could vary from an abbreviated title report with a warranty wrapper to a full American Land Title Association policy, some combination of these or even none of the above. How can automation and outsourcing help them or their captive agents easily meet requirements case by case and deliver the high level of service that borrowers want?
Consider an individual with a stellar credit rating who is seeking a relatively modest HELOC. Technologies such as instant title decision- making engines can keep their path to the closing table unobstructed. The reliance by lenders and their partners on innovations like these also will match the expectations of millennial and Generation Z borrowers, an audience that has grown up using technologies to simplify transactions. The oldest millennials are now 41
— a prime age for many to be thinking about additions to their starter homes — and they’ll appreciate lenders that can efficiently pave their financial path.
These same decisionmakers might also appreciate a lender’s use of faster, more cost-effective desktop appraisals versus full, in-person inspections — since these can often shave hours or even days from required valuation reports. From automated valuation model cascades to drive-by appraisals, there are many ways to match the right solution to the right situation.
Of course, in the case of a high net worth borrower, the optimal process may require attentive, in-person client service on a 24/7 basis from teams that understand the discretion these individuals expect. Even here, lenders and their partners can rely on certain technologies that support a borrower’s ability to move with agility.
On the closing side, remote online notarizations and in-person electronic notarization (IPEN) signings, using a computer or tablet instead of a pen and rubber stamp, offer many options. In particular, IPEN can avoid duplication of efforts and dramatically cut paper handling costs that can translate into a better bottom line.
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Now back to Kristin and Michael: Five years later, not only have they completed their addition, but one of their adult children is buying their first home. The lender’s responsiveness led this couple to make an enthusiastic referral. Indeed, servicing every home equity loan and HELOC with flexibility and loan-level precision can truly add exponential value. ●