What Was Old is New Again in Lending
Have you ever noticed how intrigued the American culture is with things that are retro? My two 20-something sons love retro clothes, especially square-bottom, striped knit ties. We buy everything from toasters to cars all designed to look like grandma’s. We spend millions of dollars each year designing new homes and additions to look like those much-admired 100-year-old homes we dream of living in … crazy fascinations with “what’s old is new again,” right?
Like all things retro, they have to disappear for a while before they return as trendy. The next “comeback” is right around the corner in the lending industry too: the return of the second mortgage and HELOC. The difference is today’s products must be produced better, more cost-effectively and safely and with far more consumer understanding of what’s being purchased.
There’s an abundance of statistics that provide ample reason to believe the second lien business is on its way back with a fury and a growing opportunity moving forward for credit unions. The National Association of Realtors has shown that sales prices (and home appreciation) have consistently grown quarter-to-quarter for the past 18 months. Realogy Holdings Corp., the parent company of the franchise group including CENTURY 21, Coldwell Banker, ERA and other well-known brands, launched an IPO last year that has traded at a 30%+ premium since then, with commission revenue growing as a result of higher sales prices.
With more than half of American homeowners refinancing their interest rates to historical lows, many believe consumers will now look to home improvements, as opposed to buying up, as a way of making more room, increasing square footage and raising home values. If you are not convinced yet, check out the stock growth of The Home Depot, which is well-positioned to be the beneficiary of harvested equity dollars driving home remodeling and expansion activities.
Next Page: Jump the Trend
Get On Board the Retro Trend
As credit union executives, how can you prepare for and maximize this coming retro lending trend? Here are some things to consider.
As the second lien business lay dormant for nearly five to six years, much has changed in the regulatory requirements necessary to stay compliant with all the reforms, Consumer Financial Protection Bureau, Real Estate Settlement Procedures Act, etc. Many financial institutions are re-evaluating their product positioning, pulling second lien lending out of the consumer loan area and moving it under the watchful eye of the residential mortgage group.
Along with building your capacity to handle growing second lien demand comes increased scrutiny from regulators who make sure your credit policies are updated, your collateral assessment procedures are safe and sound, and that your members are receiving compliant disclosures, required notice periods and updated, uniform documents.
Like our retro toasters and cars, the second lien products may look the same, but will likely take longer to produce, be more expensive to create and require more manpower and technology to keep up with the current times.
If history repeats itself, credit unions and other depositories will be producing three to four second-lien mortgages for every first mortgage within the next 24 months dramatically changing the market dynamic that has existed since the housing crisis.
With the ever-changing, highly active regulatory and compliance environment, there are good alternatives for credit unions to consider as they switch gears to assist their members with the return of second mortgages and HELOCs. There are also options to ensure the new products are produced better and more cost-effectively and safely for your members and your credit union.
You may want to leverage an outsource provider to support your ability to meet the rising demand. Maybe these providers never touch a second mortgage or HELOC loan, but, perhaps, they maintain status quo in your first mortgage business and allow you to re-allocate internal resources to the greater member demand.
You can partner with a provider on a variable cost basis and allow them to provide ongoing flexible capacity for growth in your business or non-core segments. Or you can hire internally to meet the demand, make upgrades to existing systems and go forward on your own.
There are several options, plenty of strategic execution strategies, but perhaps, not plenty of time. Although mortgage bankers are typically disenfranchised in this product space because of the lack of a balance sheet, many consumer-direct firms and non-traditional depositories are already well into taking a market-leading position for this product.
It is important for credit unions to be viable and able to respond to their members’ second lien needs. Unlike the purchase money first mortgage business, there will be a propensity for consumers to look first to a trusted, Main Street provider as the second lien trend grows.
Being quick, decisive and purposeful about the development of this retro product and its support mechanisms will position your credit union as your members’ provider of choice for the next several years.