Orig­i­na­tion

Home equity line of credit ac­tiv­ity is ac­tu­ally on the de­cline in all but one cor­ner of the in­dus­try: credit unions.

National Mortgage News - - Front Page - BY BON­NIE SINNOCK & ELINA TARKAZIKIS

HOME EQUITY LINES OF CREDIT would nor­mally thrive in a mar­ket with ris­ing prices and where many older home­own­ers are loath to sell. But HELOC ac­tiv­ity is ac­tu­ally on the de­cline in all but one cor­ner of the in­dus­try: credit unions.

There were nearly 7.9 mil­lion open HELOC ac­counts in the first quar­ter of 2017, down 12.77% from the first quar­ter of 2015, when there were about 9 mil­lion open ac­counts, ac­cord­ing to Tran­sUnion.

The num­ber of open HELOC ac­counts is down in part be­cause new ac­count open­ings aren’t out­pac­ing closed ac­counts. Through April, the num­ber of new HELOC ac­counts in­creased 1.5% from the prior year, and “that’s re­ally not an ex­cit­ing num­ber,” said Equifax Chief Econ­o­mist Amy Crews Cutts.

But when it comes to credit unions, “HELOCs are a dif­fer­ent story,” said Ginny Gomez, SVP of prod­uct man­age­ment at Tran­sUnion. Credit unions had about 1 mil­lion open HELOC ac­counts in the first quar­ter of 2017, up nearly 23% from two years ago. Credit unions now hold 13.16% of the HELOC mar­ket, up from 9.36% in 2015.

Put another way, the growth of credit union HELOC lend­ing, com­bined with the in­dus­try­wide de­cline in open ac­counts, has sent credit unions’ mar­ket share soar­ing 40% over the past two years.

The ad­van­tages that credit unions have in un­der­writ­ing and pric­ing loans may be among the rea­sons be­hind the trend, and with short-term rates climb­ing, those pric­ing ad­van­tages could in­ten­sify.

“We’re pri­mar­ily a port­fo­lio lender…and home equity is a great port­fo­lio prod­uct,” said Jer­rold An­der­son, VP of res­i­den­tial lend­ing at Chicago-based Al­liant Credit Union. “It re­ally fits well, the yield is good on it and with an in­crease in in­ter­est rate, ob­vi­ously based on prime, you’re go­ing to see an in­creased yield which is at­trac­tive.”

Credit unions are mem­ber-owned and more in­cen­tivized to of­fer their cus­tomers at­trac­tive pric­ing, noted Jorge Ponce, di­rec­tor of busi­ness de­vel­op­ment at FirstClose, a ven­dor that de­vel­ops tech­nol­ogy for re­fi­nance and home equity lenders.

“Credit unions, the way that they’re set up, they don’t have in­vestors, per se. They don’t have shares. Ev­ery mem­ber owns a part of the credit union, so ev­ery­thing is done to serve those mem­bers. They don’t have to pay out stake­hold­ers. That’s what al­lows credit unions to be more com­pet­i­tive than banks,” he said.

While credit unions, like oth­ers, got burned by un­der­per­form­ing mort­gages dur­ing the cri­sis, they still gen­er­ally re­mained more com­fort­able with slightly looser un­der­writ­ing than lenders like banks be­cause they know and an­swer to their mem­bers.

“Lenders have been very con­ser­va­tive in mort­gage un­der­writ­ing and credit unions do a good job of work­ing with mem­ber loy­alty,” so they may be will­ing to make a loan another in­sti­tu­tion may not, said Ezra Becker, se­nior vice pres­i­dent and head of re­search for Tran­sUnion’s fi­nan­cial ser­vices busi­ness unit.

That con­ser­va­tive at­ti­tude to­ward HELOC un­der­writ­ing helped Al­liant and other credit unions avoid tak­ing larger losses dur­ing Great Re­ces­sion. Now, “we don’t have a bad taste in our mouths,” said An­der­son.

“We know peo­ple are up­side down and we did take losses, but as we un­der­wrote the mem­ber, I think that was a very strong point for us,” he said. “It might be a pain when we’re orig­i­nat­ing, be­cause you’re do­ing a full doc­u­men­ta­tion re­view. But at the end of the day, it’s re­ally worked in the port­fo­lio and delin­quen­cies and charge-offs were rel­a­tively low.”

Banks also have reg­u­la­tory con­sid­er­a­tions on their HELOC ac­tiv­ity that don’t ap­ply to credit unions. For ex­am­ple, there was re­cent spec­u­la­tion whether Basel III cap­i­tal rules would in­tro­duce ad­di­tional risk weight­ing com­pli­ca­tions when it came to HELOCs, said Crews Cutts.

“The is­sue be­came that Basel wanted to im­pose a cap­i­tal set-aside against the en­tire credit line, whether used or not used. In the United States, we never re­quired that of our banks. So where Basel came down was to say be­cause it’s not callable, they would only have to have a set aside based on the bal­ance that’s drawn on the loan. But it took a long time to get there. Once it was re­solved, [bank] lenders started to go af­ter HELOCs,” she said. But the his­tor­i­cal is­sue has re­duced banks’ out­stand­ing HELOC vol­umes.

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