Why brokers could risk future business by not having HELOC available
A combination of market factors has brought home equity lines of credit (HELOCs) back into the minds of homeowners and mortgage brokers.
Homeowners are sitting on near-record home equity as consumer debt continues to pile up. Meanwhile, many traditional lenders have pivoted away from HELOCs, creating an opportunity for independent mortgage banks and non-QM lenders to fill the void.
This presents a great opportunity for mortgage brokers to not only stay in front of past customers but also attract new ones who might be in the market for a refinance in the future. One mortgage executive shares some reasons brokers should keep HELOCs in their toolbox this spring.
Tom Davis (pictured top), chief sales officer at Deephaven Mortgage, said the first reason brokers should pitch HELOCs is the speed at which they can be closed.
“What's nice about the HELOC is speed,” Davis told Mortgage Professional America. “If it's a W-2 borrower, it’s very simple. You could get things closed pretty quickly. Bank statement borrowers are going to take a little bit longer, because you have to look at the bank statement to calculate the income. At a local bank or credit union, some of those guys are taking 45 to 60 days for people to get access to capital.”
Protecting low-rate mortgages
Everybody in the mortgage world has been waiting for a surge in refinances. While it’s possible that rates could drop enough later in the year for that to happen, Davis believes that rates are going to have to drop significantly to get that started, and he doesn’t see that in the immediate future.
“I don't see rates coming down materially,” Davis said. “I think rates will potentially come down marginally. I think this will be an area where you'll see major HELOC growth over the next year. I think there are still many originators who haven't embraced it because they've never sold an equity loan in the last 10 years.
“This is a generational opportunity, because 85% of Americans have rates under 5%. It would be financial suicide to refinance if someone had a $400,000 mortgage at 3% and needed $50,000 to consolidate or put on a new roof. If they call their accountant or CPA, they would tell them to protect that 3% $400,000 mortgage. Don't pay it off.”
While Davis encourages brokers to offer homeowners options when they need additional equity, the best advice for homeowners with a low-rate mortgage is to keep the current loan and take out a second lien.
“It gives an opportunity to provide them with a couple of options,” he said. “Here's your payment if you do a refi cash out, and here's your payment if you keep your current mortgage and you take the $50,000 HELOC. The difference between the two options, you take that money, the extra savings, and pay off your second lien quicker. It just doesn't make sense to pay off a low-rate first mortgage.”
Another hidden cost for a borrower who refinances instead of taking out an equity loan is the additional fees they will incur.
“Borrowers are like, ‘Why am I going to pay points on this higher loan amount?’” Davis said. “Let's say they pay 1.5 to 2 points on a $500,000 refi. That's like $10,000 to $11,000 in fees. They're losing $10,000 to $11,000 in equity by doing a cash-out refi. Compare that to the $50,000 HELOC, which you might be able to do a no-cost loan. You keep that $11,000 in equity.”
Building relationships
Davis said providing access to HELOCs allows brokers to reach out to new referral partners by expanding their ability to provide equity loans for home rehab projects.
“It's a great way to build referral sources with the local folks that are doing renovations,” he said. “You can tell roofers, ‘Hey, when you run into a borrower that needs to put on a new roof, if they don't have the funds, I can help them.’ We're seeing originators think outside the box and look at other referral partners and teaming up with folks in their markets for these types of products.”
Of course, it’s not just referral partners that brokers need to reach out to with these equity products, Davis said. Reaching out to former customers who might be looking to make some home improvements puts you back in their minds and might give you a better chance of beating out a servicer for a refinance later on.
“They need to embrace equity products,” Davis said. "If they don't have these products available, or they don't stay in front of their customers, that customer still has a financial need, and someone else is going to offer it to them. If it's the servicer and they get the first and second, they now have about an 85% chance of getting that recapture.
“It's a great opportunity to call every client in the past that you've ever worked with. You get to congratulate your past customer on their equity and their low rate on their first mortgage that you helped them get. It's a big mistake if originators don't offer the product, because someone else is going to offer it, and it's an opportunity for someone else to take their client base.”
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This article is part of our Monthly Spotlight series, which in February focuses on HELOCs. Full coverage can be found here.
