Recent years have seen a shift in the mortgage lending landscape for credit unions in regard to home equity lending. Rapid Home Equity Line of Credit (HELOC) growth has been seen due to higher interest rates which has resulted in a slowing in traditional loan originations. Interest rates have also led members to opt for HELOCs, allowing them to not only keep their low rate first mortgage but still access the equity in their homes.
While HELOC lending allows credit unions to continue to grow in a challenging mortgage market, it is not without its unique challenges. The variable rate nature of many HELOCs can lead to payment shock when the interest-only payment period ends and shifts to both principal and interest payment, causing the borrower to become delinquent in their payments. In addition, HELOCs run a second lien position risk. Since many HELOCs sit behind a first lien mortgage, this could lead to limited recovery should the first lien foreclose.
In order to avoid these pitfalls, it is important for credit unions to be diligent with member outreach and ensure their staff are well versed in loss mitigation processes such as loan modifications, fixed-rate segment offers, and other options specific to HELOCs. Senior lien monitoring is also an effective tool for credit unions to preserve their financial interest. This type of early warning allows credit unions to be proactive should the first lien mortgage fail to perform.
Overall, with proper staff training, continued member outreach, and consistent senior-lien monitoring, HELOCs are an effective tool for credit unions to expand their mortgage lending portfolio during a period of higher interest rates.