HELOC Revival Spurs New Fraud Concerns

DALLAS– Home equity products have enjoyed a revival in popularity over the past few years, driven in part by recovering economic conditions, rebounding home prices and maturing of earlier vintages.  

The Joint Center for Housing Studies of Harvard University projects annual spending growth for home improvements to accelerate to 4.0 percent by first quarter 2016. Chris Herbert, managing director of the Joint Center, said recent data point toward an improving housing market.  

“A major driver of the anticipated growth in remodeling spending is the recent pick up in home sales activity,” Herbert said. “Recent homebuyers typically spend about a third more on home improvements than non-movers, even after controlling for any age or income differences, so increasing sales this year should translate to stronger improvement spending gains next year.”  

Additionally, the Home Improvement Research Institute projects home improvement product sales growth to accelerate over the next two years, with 2015 forecasted to increase by 5.7 percent over 2014 to more than $320 billion.  

Here at the Mortgage Bankers Association’s recent Risk Management, Quality Assurance and Fraud Prevention Forum, analysts said the increase in home equity loans should also raise questions. They noted while home equity loans remain an attractive supplement to an institution’s net interest margin, lenders need to revisit their credit strategies–and learn from mistakes made in the previous lending cycle to limit credit risk exposure and maximize returns.  

Mark Schulman, mortgage chief credit officer with SunTrust Mortgage Inc., Richmond, Va., said the home equity market offers many opportunities, but also significant risks. “We’re still living with a lot of these past issues,” he said.  

HELOC origination volume totaled $71 billion in 2014, an increase of 13 percent in 2013 but still well below the market peak, 2003-2004, when it reached $340 billion. Tom Anderson, consumer finance group senior manager with PwC, New York, said consumer sentiment is changing.  

“Overall consumer confidence is on the rise,” Anderson said. “Combined with increases in home prices, we think many consumers are going to stay put and improve their current residences.”  

Anderson cautioned, however, that while “significant opportunity” exists in new equity products, existing portfolios are approaching the end of their draw periods, which is causing delinquency rates to rise. This year marks the start of a three year period where nearly $131 billion-half of outstanding HELOC balances-have scheduled transitions from draw period to repayment.  

“It’s an issue, but it’s not a huge issue at this point,” he said. “Obviously, the elephant in the room is compliance, and servicing rules for HELOCs don’t necessarily apply to traditional home loans…knowing how to deal with HELOCs from a compliance standpoint is very important.”  

Anderson said another challenge is that aggressive action is occurring at the lower end of the market-loans up to $25,000-by lenders who might not have the best ethics in mind. “Rates can be lower there; new entrants are posing challenges,” he said.  

Duane Elmer, consumer lending risk executive with Bank of America, Dallas, said a “general breakdown” in HELOC underwriting led to massive problems 10 years ago. “Many of the challenges that resulted from this lax underwriting has been addressed since,” he said.  

Matthew Merlone, assistant vice president of product and fraud strategy with First American Mortgage Solutions, Santa Ana, Calif., said many HELOC lenders did not account for the sheer amount of fraud in the application and underwriting process.  

Collectively, “we missed the ball on this,” Merlone said. “And we reaped the benefits. We simply as an industry did not have the same controls in place for HELOCs that we did for other products.”  

Merlone said fraud issues persist in HELOCs, with cyber threats-“phishing;” “smishing;” “pharming” and other schemes target home improvement loans, and particularly with senior citizens.  

“All they want you to do is click on their link, which allows them to access your account and do major damage,” Merlone said. “These are the same old familiar schemes that we saw with first mortgages…we uncovered one scheme in Chicago that targeted mortgage companies over the Christmas holiday, because they knew that most of the regular employees would be off during that week and the companies would be staffed by less-experienced employees.”  

Going forward, Elmer said fundamental underwriting has substantially improved. “Especially in larger organizations, the only way to have consistent outcomes is to have consistent practices.  

Elmer added that “tremendous opportunity” exists for HELOC lenders, with homeowners sitting on more than $6 trillion in new equity. “When you look at industry data, you see a lot of people with low loan-to-value ratios,” he said. “These are people who can tap their equity with less risk.”  

Anderson said Millennials will also be around to tap the HELOC market. “There’s been a lot of focus on Millennials getting into the purchase market, but the need for HELOCs is there, too,” he said.