Mortgage rates and home prices are one of the hottest topics going today, and have been for more than a year as builders struggle to catch up with demand following the massive interruption on the supply chain due to the long-term effect of the COVID-19 pandemic and the flight of many people from crowded cities to more spread out suburbs.
According to research from Black Knight, home prices are up a staggering 42% since the start of the pandemic in March 2020, with a full 9% of that happening since the beginning of 2022.
Homes are at their worst point for affordability since July 2006, a high-water point that preceded the beginning of the collapse of the housing bubble that precipitated the Great Recession. From the latest data on August 2, 2002, we see that 30-year mortgage rates sat at 5.26%, meaning individuals trying to get into the market are facing a steep uphill battle even to qualify, with the additional difficulty of finding a match in the ever-dwindling supply of inventory after you have secured funding.
On the flip side of those skyrocketing rates is the fact that current homeowners are in one of their strongest positions in years. Things are happening so quickly that we are again seeing a push to have much more of the mortgage process move to the use of digital technology.
Return of the HELOC
For those homeowners seeking to use their impressive home values as a line of credit in order to achieve other financial goals, the time has never been better, as they typically have locked-in interest rates and are sitting in houses that are worth almost 50% more than they were three years ago.
Home equity lines of credit (HELOCs) have left a bad taste in the mouths of many in the industry and for a good reason. They peaked in use between 2003 and 2006 but were the source of massive problems and lots of foreclosures when housing values plummeted. Because HELOCs operate with a variable interest rate based on the federal mortgage rate, things can get dicey for lenders in a hurry if they are borrowing liberally at a low rate, then see that rate skyrocket, as has happened here recently with home prices and inflation through the roof nationally.
In the 2000s, there were multiple state and federal income tax laws that offered healthy incentives to people taking loans in this fashion as opposed to using credit cards, and the schedule of repayment was dictated by the borrower. But when home prices plummeted, the object of the loan suddenly was no longer quite so valuable and while banks were able to foreclose on property when the owner couldn’t pay back the loan, they were suddenly in possession of assets that had dramatically fallen in value.
HELOC loans have undergone a major overhaul in the 15+ years since those dark days. The tax credits are gone by the wayside and for a long time, most people shied away from HELOCs altogether. However many homeowners have realized that taking out a HELOC loan now is a smart investment, as they believe their homes are at an all-time market high price and will only drop from here. Thus, in theory, the money taken out today will be a much larger amount than the homeowner could take out in five years.
HELOCs have impressive flexibility, as there are not many restrictions on what the funds can be used for. While plenty of people opt for home-improvement projects, literally investing the house’s own equity into improving its overall value, others use the funds to help contribute to college funds, to plan a move that involves extensive traveling, to pay down or consolidate student loan or credit card debt, or to pay for medical bills.
Are Lenders Fully Equipped For HELOCs?
The question then becomes, are today’s lenders actually equipped to begin offering HELOCs in large amounts successfully while avoiding the pitfalls of the 2006 era?
The industry might have learned some sore lessons when the housing bubble burst, but many lenders have not done an impressive amount of work to upgrade their technology to match current trends and expectations of efficiency from customers.
HELOCs look simple to homeowners, and are often viewed as a “God send” when they have a disaster like a car that needs replacing, major disasters in the home, health problems, or the need to reduce debt for credit cards and the like. When HELOCs are mismanaged, however, they cause even larger problems and can result in missed payment, credit-score hits, and foreclosures.
In order to effectively offer HELOC loans that are competitive with other banks, mortgage companies have to ensure that both lender and homeowner are working in tandem to avoid disastrous results.
Digitizing the application and approval process is the first step in this, followed by having an effective dashboard system that charts in real time all of their lendees’ interest rates, withdrawals, current lines of credit, and current equity in the house from traditional mortgage payments.
Does it mean that every lending company needs to go through a massive, expensive overhaul to achieve the needed transformation? Not at all.
Working with a third-party partner like LendArch, enables even the most complex changes to be done in a way that allows home buyers and team members to transition smoothly to a new digital experience.
Ready To Transform The HELOC Process? Let’s Talk!
The end-to-end HELOC process is complex and can increase the risk and liability for lenders.
LendArch is here to help lenders, brokers and originators simplify the process, determine the best technology stack and enable straight through processing for HELOCs.
Contact our team for an expert point-of-view to get started!
As Chief Executive Officer, Tammy Richards brings over 35 years experience in Mortgage Banking, EClose/EMortgage, Robotics/AI/OCR/ICR implementation and more. She has been an executive and has led Nationally at Bank of America, Caliber Home Loans and most recently served as Chief Operating Officer for Loan Depot. She is passionate about and is an expert in the mortgage industry's ongoing tech transformation.