Increase Home Equity Lending Without Increasing the Risk of Default

For many financial institutions, the housing market crash that frightened lenders from Home Equity Loans and HELOCs above 80% Loan-to-Value (LVT) has become a distant memory. However, the risk associated with home equity lending remains top-of-mind for many as the mortgage market continues to cool.

Lenders seem ready to take advantage of the trend towards more equity lending, but may wonder if equity lending above 80% LTV is worth the risk. Is equity lending a viable market with profit to be had? Could the risk of loss outweigh the expanded customer base? In the following content, we hope to clarify these real, understandable questions, exploring a simple method of increasing equity lending while reducing risk of default.

The Refinancing Trend & The Home Equity Trend

There is no doubt about the popularity of purchase and mortgage originations in recent years. Freddie Mac forecasts mortgage originations to still reach about $2.1 trillion in 2022 but for refinance activity to fall from $2.8 trillion to $960B. How are each of these trends being shaped individually?

The Current State of Refinancing

Since the housing market crash, lending institutions have leaned into refinancing as homeowners capitalized on low interest rates. However, with the increase in interest rates, the  refinancing trend has significantly slowed.   Most borrowers now have a very low mortgage rate locked in for many years to come and will rely on home equity lending for home improvements projects, debt consolidation, college tuition, and emergency medical uses.

While refinancing rates have ground to a halt, equity in homes is at an all-time high.

The Current State of Home Equity

Recently, banks and credit unions have turned to Home Equity Loans and HELOCs to supplement revenue lost from reduced refinancing. There are multiple reasons why financial institutions should expand their home equity lending portfolio, and the first involves the current state of home equity in America.

Equity is at an all-time high, driven by skyrocketing home prices. Black Knight’s Home Price Index showed home prices increasing at a 10.8% annual rate. The company recently reported that “over 46 million homeowners have $11 trillion in tappable equity,” staggering and literally unprecedented numbers.

As Americans find themselves flush with equity, forgotten home projects become realistic options, college educations can be paid for, and debt can be consolidated with lower interest rates. Home equity loans meet the needs of the market in numerous ways, and lending institutions are prudent to be prepared to provide these loans.

Along with the startling state of American equity, financial institutions are turning to Home Equity Loans and HELOCs due to the availability of home equity risk mitigation programs.

At Red Rock Financial, we work with you to customize the underwriting parameters and program. Once we have designed the program to meet your needs, we are able to provide a premium structure that keeps the cost of the program very competitive in the marketplace. We site five important facts about our premiums to prospective lenders:

1. We individually underwrite every lending institution to determine the cost of the program. Customized premiums ensure that every financial institution receives the best pricing available.
2. This premium is passed along  to the borrower via a slightly increased interest rate, as mentioned above. The lender does not directly incur a cost.
3. One rate applies to every loan type save HELOCs; these loans are covered for the full line amount, but only charged premium for the utilized balance.
4. The premium is paid monthly using a secure site. 

Finally, payments are often made through ACH or a wire transaction.

“Risk-Free” Equity Loans with an Equity Protection Program (EPP)

Home equity loan deals are unequivocally increasing – simultaneously, inflation, the possibility of job loss  and a pandemic-inspired recession increase the risk of default.

However, financial institutions that can increase home equity loan volume without increasing risk and have a leg up in this competitive market. What is the solution? How can a lender minimize risk while maximizing volume? The answer is an Equity Protection Program (EPP).

How can an EPP help? Below, we answer some of the most frequently asked questions we receive about protection programs and their reliability for lenders.

#1. What is an EPP?

Equity protection programs are fully insured loan portfolio programs intended to help institutions increase loan volume without taking on additional risk.

#2. How does an EPP protect the lender?

In the event of default, the full balance of the covered loan is payable after approximately 90 days, without incurring expensive foreclosure, charge-off or ROA charges.

#3. How are EPPs paid for?

Lending institutions hardly notice the cost of the program. Most financial institutions cover the EPP with a slight interest rate increase on the higher LTV loans, one that is imperceptible to borrowers.

#4. What are the benefits of an EPP?

Among a variety of other benefits, EPP programs allow lenders to:

• Expand LTV thresholds
• Insure loans and lines of credit up to $250,000
• Include loans with FICO scores as low as 660
• Increased home equity loan production
• Expanded customer base by offering loans that many other institutions do not provide
• Enhanced customer retention and loyalty
  
  

Red Rock Financial: Trusted Equity Protection Programs

Our EPP program is time-tested and trusted by prominent banks and credit unions around the country.

The eligible loan types for our EPP include:

• Traditional HELOCs
• Traditional Closed-End Loans
• Purchase Money Loans/Lines
• Home Improvement Loans
• Unsecured Home Improvement Loans

 
The Equity Protection Program is simple to implement, and results are often seen quickly. Our Lender Application form is a straightforward, one-page form. Once the proposal is crafted and signed, we collaborate with the lending institution to perform necessary due diligence. Then, a comprehensive training is scheduled for all necessary staff members, and the financial institution is prepared to advertise additional loan options to customers and employees.

Do you think our program might work for your institution? Let’s start a conversation. You can get in touch with our team at (847) 867-3311 or via our online contact form.