WHY YOU SHOULD CONSIDER. TRACKING HELOCs AND HOW TO STREAMLINE THE PROCESS

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1 WHY YOU SHOULD CONSIDER TRACKING HELOCs AND HOW TO STREAMLINE THE PROCESS

2 TABLE OF CONTENTS INTRODUCTION...3 WHY IS TRACKING HELOCs AN IMPORTANT SERVICE FOR LENDERS... 5 OPERATIONAL ASPECTS OF HELOCs... 7 THE BENEFITS OF OUTSOURCING HELOC MONITORING... 9 CONCLUSION...10 Why You Should Be Tracking HELOCs 2

3 INTRODUCTION Home equity lines of credit (HELOCs) are essentially a type of mortgage or line of credit that provides homeowners with the ability to borrow money against their home. In the past, HELOCs were relatively common among all homeowners, however, in recent years they have become harder to obtain. According to industry experts, this may be changing again in the coming years. With HELOCs once again gaining momentum, it is imperative that they are properly tracked within financial institutions. HELOCs are often considered a second or third lien, and it is therefore important to track them to ensure taxes have been paid on the first mortgage. HELOC customers are typically A+ credit grade who have more equity available in their home. For these customers, HELOCs are a wonderful option because they allow them to have access to equity in their home, should they need it. HELOCs are a great backup plan that give people the opportunity to draw on the equity of their home, should they fall on hard times or want to take on some home renovation projects. Before we take a more in-depth look at why tracking HELOCs is an important service for lenders and the benefits of outsourcing HELOC monitoring to a third party vendor, let s briefly go over what a HELOC is and why they are important to banks and credit unions. Why You Should Be Tracking HELOCs 3

4 WHAT IS A HELOC? As mentioned above, HELOC stands for home equity line of credit and it is commonly referred to as a second mortgage. In many if not most cases, their home is an individual s most valuable asset, which means they can use it as collateral for an additional loan. As you are likely aware, the downside of that is that if the borrower cannot make good on their debt, they may lose their home. When used correctly, HELOCs can be drawn on over a definitive amount of time and paid down, or drawn on again for additional funds as they become available with the equity of a given home. The process of getting approved for a HELOC is much like that of a first mortgage, however, there are typically higher standards of credit and limited loan to values where HELOCs are concerned. A few key features of HELOCs include: Interest-only payment is available during the draw period Once the draw period is over, the payments are amortized over the remaining period HELOC funds are available to be used at the borrower s discretion, as long as the loan parameters have been met With these points in mind, let s look at why it is important for lenders to track HELOCs and ensure they are properly monitored. Why You Should Be Tracking HELOCs 4

5 WHY IS TRACKING HELOCs AN IMPORTANT SERVICE FOR LENDERS From the lender s perspective, it is of the utmost importance that HELOCs are tracked so that all taxes are paid and on time. When HELOCs go unmonitored, the risk levels of the loan are much higher, in large part because of their position as a secondary lien. Let s say a borrower is focusing on paying off the first mortgage and that is all the lender is aware of, too. Because the second mortgage or HELOC was not being tracked or monitored, it is quite possible that the borrower could be delinquent on their property taxes and the lender wouldn t realize this until it was too late. In order to better understand why tracking HELOCs is important, it may help to have a better understanding of the history of the market and where it is headed. History of the HELOC Market In the mid-2000s we saw an increase in the amount of mortgage debts across the nation. Unfortunately, this was in part fueled by the number of HELOCs that were being granted. During the recession and economic crash, homeowners were taking advantage of lines of credit in order to try and stay afloat financially. Research indicates that the majority of those HELOCs originated between 2004 and In the years following the Great Recession, financial institutions had to work hard in order to combat the oncoming waves of defaults. Because of this, banks and credit unions were less inclined to just hand out HELOCs, and rightfully so. However, times are changing. Thanks in part to an improved economy and real estate market overall, lenders are much more willing to lend, which is helping propel the HELOC market once again. In fact, we predict HELOCs to once again become a hot commodity, especially because they are now typically only awarded to borrowers with excellent credit. There are numerous reasons why we expect HELOCs to take off in the future, but here are a couple big ones: Home values are up HELOCs have much better interest rates than credit cards Unemployment rates are down from all-time highs, which is giving people peace of mind and once again inspiring them to become homeowners Why You Should Be Tracking HELOCs 5

6 WHY IS TRACKING HELOCs AN IMPORTANT SERVICE FOR LENDERS Benefits of Tracking HELOCs Whether HELOCs are in the first, second or third lien position, there is an increased risk associated with escrow accounts and the payment of property taxes. HELOCs can cause a major headache for lenders when not monitored, as it could mean the borrower has become delinquent on their taxes. Because a HELOC is essentially a lien on the borrower s property, when they default on the payments, it could spell trouble for both lender and borrower. The borrower is at risk of losing their home, and the lender may not recoup the funds for the credit line. Now that we ve discussed the why of tracking HELOCs, we can take a more in-depth look at this subject from the lender s perspective. Tracking HELOCs is an important customer service for borrowers, as it ensures they will not become delinquent or fall behind on paying back their credit line. From the lender s perspective, closely monitoring HELOCs will help ensure they are offering every borrower an invaluable service. Why You Should Be Tracking HELOCs 6

7 OPERATIONAL ASPECTS OF HELOCs Now that we know what HELOCs are, where they ve been, and why it is important they are properly monitored, let s look at how they are handled operationally within a given institution. HELOCs are typically approved for a specific dollar amount that can then be drawn on over a period of time (usually years) and then have an additional 5-10 year payback period. The majority of people use HELOCs for home repairs and upgrades, but they can also be used to cover an unexpected medical or other expense. Because the line of credit is backed up by collateral (the borrower s house), the interest rates are typically lower than other loans. HELOCs are well-known for boasting high limits with lowinterest rates, which are just a couple of the reasons why they are so attractive to borrowers. Furthermore, because they are considered home loans, many state and federal laws allow the interest paid on these lines of credit to be tax deductible. Understanding the HELOC Process In most cases, HELOCs are monitored the same as first mortgages. One difference is that it may not be necessary for them to be tracked as often, especially if the first mortgage is held by the same institution and is being adequately monitored. One of the most important things to understand when it comes to how HELOCs are monitored and the internal operations surrounding them is that they are secured loans that use the borrower s home as collateral. This is worth mentioning again, because the borrower is at risk of losing their home if they default on their HELOC. Let s take a brief look at what a typical HELOC process looks like: The borrower applies for a HELOC with his or her chosen financial institution The lender reviews the application and awards the loan It is at this point that the HELOC limit is set, and the home is designated as collateral Why You Should Be Tracking HELOCs 7

8 WHAT CHARACTERISTICS SHOULD YOU LOOK FOR IN A VENDOR? The HELOC then enters the draw period This is a span of 5-10 years that enables the borrower to withdraw money as he see fits The borrower is typically given a checkbook or credit card to use for withdrawals If the borrower chooses to withdraw from the HELOC during this time period, he must make a minimum payment (which may be interest-only) No payment is required if the money is left untouched The HELOC enters the repayment period This is typically years and the borrower is no longer allowed to make withdrawals, but must instead start making payments to reimburse the financial institution for the borrowed amount Each institution may have different stipulations in regards to the HELOC application, withdrawal and repayment process, but they generally follow the above guidelines. Because of how complicated the nature of these loans can get, it is all the more important they are being tracked and monitored for delinquencies or any other red flags. When it comes to HELOCs, borrowers can t always be sure that all their loans are being tracked for delinquency. This is especially true in the event the customer does not hold their first mortgage. Because of this, transparency is a very real potential risk that lenders face. In order to head off any problems before they present themselves, it may be in a financial institution s best interest to consider outsourcing this service to a knowledgeable third-party vendor. Let s fact it, lenders have a lot on their plate already, and it can be difficult to ensure borrowers are staying on top of each and every payment they have. With the help of a third-party vendor, lenders will no longer have to worry whether or not borrowers are staying current with their HELOC payments. Why You Should Be Tracking HELOCs 8

9 THE BENEFITS OF OUTSOURCING HELOC MONITORING The role of an outside vendor when it comes to tracking and monitoring HELOCs for a bank and credit union is to provide transparency for tax delinquency. This is absolutely critical for lenders, as it will provide them with information and knowledge about any potential issues associated with the line of credit. An outside vendor will also provide the following when tracking HELOCs for lenders: Information on any changes within the loan portfolio Insight on any potential problem loans or areas within the loan portfolio Transparency for tax delinquency Information to help the lenders better understand the HELOC and how the borrowers are approaching paying back the debt Keep in mind that not all vendors are created equal, so it is important to look for a third-party company that will offer flexible solutions for tracking HELOC portfolios. If you work with the right vendor, you should be provided with solutions that are designed to suit your institution s specific needs when it comes to monitoring HELOCs and ensuring borrowers do not become delinquent. $ L OR E M I P S U M DOLOR $$ orem ipsum dolor sit amet, consectetur adipi adipiscing li elit. Donec tincidunt mi mi id id hendrerit i iaculis. Given the fact that HELOCs are expected to become much more popular in the coming years, tracking them annually will also become more important to banks and credit unions. If done right and by a vendor who is committed to providing customized solutions for each and every HELOC portfolio, financial institutions and their borrowers will be in good shape. review process and other important protocols. Why You Should Be Tracking HELOCs 9

10 CONCLUSION With the economy on the mend and unemployment rates down from record highs, we are once again seeing a thriving housing market. As more people begin to buy houses, we are expecting to see a rise in the number of HELOCs issues across the nation. The more HELOCs there are, the more important it will be to ensure they are properly tracked and monitored. When banks and credit unions try to do this internally, it can lead to numerous problems, for both the lender and the borrower. This is why it is a good idea for banks and credit unions to consider outsourcing this service to a knowledgeable third-party vendor. Whether the HELOC is in a first, second, or third-lien position, it is of the utmost importance that the first mortgage is being paid and the tax insurance payments are current, in addition to the HELOC payments themselves, which is where a vendor can help. ABOUT INFO PRO helps residential, commercial and agricultural lenders of all sizes minimize risk and cost while improving efficiency when servicing loans, allowing them to focus valuable time and resources on growing the business. We do this by providing real estate tax, flood determination and property insurance monitoring services that give lenders the information they need to service loans and achieve compliance. Learn more at Why You Should Be Tracking HELOCs 10