HELOCs Better Suited For Servicing Platforms.(Home Equity Line Of Credit)

Mortgage lenders and servicers have an insatiable appetite for two things: risk minimization and cost reduction. While this may sound like an oversimplification, it is certainly true that financial institutions are laser-focused on these two critical areas of performance. Their ability to compete, invest and thrive is largely dependent on how successfully they manage their risk and contain their cost of operations. Both are impacted by the way home-equity line of credit products are serviced.

HELOC products have traditionally been serviced on consumer-lending platforms, and the original decision to do so was probably made because these loans have features similar to personal unsecured and credit card loans. Especially in the early days of HELOC loans, when the available line of credit was typically 10% or less of LTV (loan-to-value), risk remained relatively low and reliance was on character and not collateral. In the case of default, lenders simply wrote off their losses and later, hopefully, recovered some or all of their losses.

But there are several key factors in the mortgage industry that are driving the decision to transition HELOC loans from consumer servicing platforms to mortgage servicing platforms. These factors stem from the rapidly changing HELOC market and growing level of risk associated with these loans, the desire to attract a wider range of investors, and the pervasive need for lenders to reduce non-value added overhead.

The Changing Market

One of the most obvious changes in HELOC products is that consumers are paying down their first mortgages and increasing their home equity lines of credit. HELOCS are not only growing in terms of the amount (now averaging $46,000 for larger institutions), but they have also grown in terms of percent of LTV. In fact, in some cases they are as high as 110% of the value of the underlying collateral. Further, the refinanced HELOC has become the loan of choice for many lenders and borrowers alike due to its ease and flexibility vs. the traditional mortgage loan. As a result, many HELOC lenders are being challenged to provide the customary escrow services to which mortgage borrowers have become accustomed.

This has significant implications for financial institutions. First, writing off defaulted loans is much less viable as the average level of loan debt grows. Yet, a consumer debt operation is ill-prepared to navigate efficiently through mortgage default collections, bankruptcy, foreclosure, loss mitigation and credit bureau and regulatory reporting requirements while using a consumer loan servicing system. While consumer-oriented employees and their supporting technology may be able to struggle through this process, it is very likely it will be a more costly, time intensive process than is necessary, and will produce less than optimal results.

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