Anna Krogh From Dovenmuehle: When Unlocking the Potential of Home Equity, Understanding the Servicing Nuances is Key

Anna Krogh is senior vice president at mortgage subservicer Dovenmuehle, Lake Zurich, Ill.

Home Equity Lines of Credit (HELOCs) provide a flexible borrowing option for homeowners looking to access their home equity, offering an alternative to traditional cash-out refinances, which homeowners may be reluctant to consider if they’re currently holding a below-market interest rate on their primary mortgage. While traditionally dominated by depositories, independent mortgage bankers (IMBs) are now entering the HELOC market, marking a notable shift in the industry.

The demand for HELOC products is on the rise. At the beginning of 2024, the typical mortgage-holding homeowner had average equity of $299,000, representing an increase from $274,000 in 2022; a substantial escalation from $182,000 recorded at the outset of the pandemic. Collectively, this translates to more than $32 trillion in available equity.

In addition, many homeowners are opting to tap into their homes’ equity to clear other high-interest debt, which remains elevated from a year ago according to Q1 2024 data from The Federal Reserve Bank of New York’s Household Debt and Credit Report:

Credit card balances, which are now at $1.12 trillion outstanding, decreased by $14 billion during the first quarter but remain 13.1% above the level a year ago. Auto loan balances increased by $9 billion, continuing the upward trajectory that has been in place since 2020Q2, and now stand at $1.62 trillion…Student loan balances were effectively flat, with a $6 billion decrease, and stand at $1.6 trillion.

As depositories increase HELOC lending activity and more IMBs enter the HELOC market to diversify their offerings and meet consumer needs, mastering the nuances of servicing these assets becomes essential.

Servicing first-lien mortgages is often a relatively straightforward process, where funds generally flow in one direction in the form of monthly payments from homeowner to servicer. This is not the case with HELOCs, as these loans feature revolving credit, variable interest rates, and distinct draw and repayment periods. Additionally, borrowers need multiple ways to access their funds, including check disbursements, debit card transactions, online banking portals, and mobile banking applications. Each access method presents its own unique considerations for lenders, including security measures, real-time credit limit controls, transaction processing times, and user experiences. Balancing these factors is essential to provide borrowers with secure, convenient, and efficient access to their HELOC funds.

Successfully servicing HELOCs requires not only a focus on borrower convenience, but critically also a clear understanding of regulatory requirements. Examples include managing variable rates, temporary introductory rates, and multiple segments or “tranches” such as fixed and floating segments.

Additionally, effectively handling line of credit availability in real time to avoid overdrafts (whether inadvertent or intentional) is crucial. Ensuring compliance with regulatory guidelines and maintaining the integrity of the servicing process requires specialized expertise, which lenders must also consider when adding HELOCs to their portfolio mix.

For lenders considering outsourcing HELOC servicing, partnering with experienced specialists can provide strategic advantages. Specialized servicers bring expertise in managing the nuances of HELOC products, including advanced technology and compliance measures that improve efficiency and risk management.

Digital innovation plays a crucial role in modern HELOC servicing. Lenders are tailoring their solutions to match the preferences and capabilities of different borrowers by providing convenience through user-friendly online portals and mobile applications. Leveraging advanced technology allows lenders to streamline processes, enhance security measures, ensure real-time credit limit controls, and provide a seamless borrower experience. Moreover, ensuring compliance and risk management in this digital landscape is equally essential. Lenders must maintain regulatory compliance and mitigate risk while utilizing these digital advancements.

Ongoing innovation and adaptation are paramount in the HELOC lending industry. As market dynamics and borrower preferences evolve, lenders must stay ahead of the curve. This involves embracing technologies, such as artificial intelligence (AI), application programming interfaces (APIs), and machine learning (ML) to enhance operational efficiency and risk management practices.

For example, APIs can offer digital access to the HELOC while supporting real-time credit limit control to mitigate errors and fraud. AI and ML can add to the convenience and efficiency by intelligently routing borrower requests to the appropriate departments for quick resolution. Using these technologies, servicers can also track borrower information in real-time, identify processing bottlenecks and improve overall operational procedures, ultimately providing a better customer experience for homeowners.

With demand continuing to grow, HELOCs offer a viable product for IMBs and depository mortgage lenders alike, especially as the traditional purchase market continues to stagnate due to current interest rate and housing inventory environment. As IMBs and depositories embrace more HELOC lending, they must stay informed about the latest trends and best practices in HELOC servicing to ensure long-term success and compliance.

(Views expressed in this article do not necessarily reflect policies of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions. Inquiries can be sent to Editor Michael Tucker or Editorial Manager Anneliese Mahoney.)