Another Helping Of HELOC Heroes

How three credit unions are using creative home equity lending programs to defy a national trend.

The credit union industry posted 9.9% year-over-year growth in overall lending in the quarter ended June 30, the highest since 2005. Lending activity contributed to the industry’s first quarterly growth in total revenue in five years. Amid this solid performance, though, the industry’s $71.5 billion in HELOC and similar lending in the second quarter of 2014 was a 0.8% year-over-year decline when compared with the $72 billion it generated in 2013.

Despite the flat to slightly declining activity in home equity lending, three institutions profiled on in recent months Hanscom Federal Credit Union, Workers’ Credit Union, and Heritage Federal Credit Union are still making hay with HELOCs.

A Twist On The Familiar HELOC

Hanscom Federal Credit Union ($1.07B, Hanscom AFB, MA) offers its 55,500 members three ways of drawing on its HELOC: using checks, a credit card attached to the account, or fixed payments based on a locked rate for a portion of the line of credit.

The latter is typically for a term of five or 10 years and borrowers can use it for up to three different portions of the HELOC. As members make payments, that portion of the HELOC becomes available again. Loan-to-value ratios of 100% are available to the most credit-worthy members. Those with the best scores and the lowest combined LTV ratios can expect an adjustable rate of prime minus half a percentage point.

We’ve found risk hasn’t been an issue among those members, says Tom Becker, senior vice president of lending at the Massachusetts credit union. We’ve had people over the years especially in 2008, 2009, or 2010 that got a 100% line of credit and the value of their homes dropped. They were underwater, but they continued to pay us because they liked the house and were good, solid members.

Becker says Hanscom had $263.3 million outstanding in the 3-in-1 HELOCs as of July 31. That’s up from $240.8 million in May, and the average outstanding balance is $47,717, up from $46,500 earlier this year.

A Mortgage Suite That’s Fast On Its Feet

At the 76,400-member Workers’ Credit Union ($1.8B, Fitchburg, MA), purchase mortgages jumped from 10% of real estate activity to approximately 40% from 2012 to 2013. During that time, the credit union’s Finish Line loan bolstered its growth in HELOCs. The program is still popular today, although its impact is dwindling.

Now in its fifth year, Finish Line is aimed at borrowers close to paying off their homes and offers a 7-, 10- or 12-year accelerated mortgage at a fixed rate. The credit union underwrites the notes as a home equity loan rather than a traditional refi, and although HELOCs are down from the $2 million to $4 million a month the credit union booked last year at this time, the product still generates approximately $500,000 a month in activity, says Tom Gray, senior vice president of lending at Workers’.

The loans average $75,000 to $80,000 and 40% loan-to-value each, Gray says. Because the loans are less complicated than a traditional refinance or first mortgage, more employees can originate and handle them. Finish Line loans don’t require an attorney, full appraisal, or title search, and they can be closed at a branch in a week instead of a month.

The loans also help Workers’ maintain a high penetration rate. According to Peer-to-Peer Analytics by Callahan Associates, Workers’ ranks sixth among credit unions of $500 million to $1 billion in assets nationally with 12.64% of its members holding real estate loans at the end of second quarter 2014, down slightly from 12.92% in the year-ago quarter.

Hanscom ranks fifth in that listing. Its 13.2% penetration rate is up from 12.47% in the year-ago quarter. The No. 1 credit union on the list, IC Federal Credit Union ($536M, Fitchburg, MA), is headquartered in the same town as Workers’ and has a 19.21% penetration rate.

Rebalancing Portfolios The Simpli-Easy Way

For the past four years, the 46,100-member Heritage Federal Credit Union ($470.5M, Newburgh, IN) has allowed members with smaller balances to refinance first mortgages by converting them into home equity loans.

The Simpli-Easy loans are targeted at members with good credit paying higher-than-market rates on mortgages with 15 years or less to be paid, loans that if refinanced conventionally would typically carry higher closing costs than the borrower would recover during the years left on the note.

Simpli-Easy loans range from seven to 15 years with loan-to-value ratios of 80% or less and are capped at $200,000. Heritage charges the borrower a flat fee of $199 and processes the loan through the consumer lending side instead of its mortgage division.

Strict underwriting requirements keep the risk low, and the program has helped Heritage diversify its books.

Simpli-Easy allowed us to rebalance our portfolio with good quality loans that, because of our pricing, will be paid off somewhere around the 10- or 11-year mark, says John Phipps, the Indiana credit union’s chief lending officer.

Heritage originated more than $41 million of Simpli-Easy loans in 2012 and 2013 and has added another $6.5 million so far in 2014, Phipps says.

September 29, 2014

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