Credit unions may have to start competing even harder for home improvement loans in the wake of this summer’s devastating hurricanes.
That’s because the damage caused by Hurricanes Harvey, Irma and Maria this summer was so severe and so widespread that millions of consumers are likely to need home improvement loans and home equity lines of credit, and credit unions will be squaring off against myriad other lenders offering those same products to consumers looking for the best rates and terms available.
According to Jackie Adams, VP of mortgage lending at eCU Mortgage LLC, a CUSO and subsidiary of the $680 million First Service Credit Union of Houston, Texas, the damage Houston sustained as a result of Hurricane Harvey was “unprecedented” in scale and a phenomenon of such magnitude that she had never witnessed before. Given the widespread damage in the greater Houston region, the need for home equity loans and home improvement loans is very large.
“This area is still reeling from the shock of the hurricane,” she said.
An initial report from Rice University’s Baker Institute for Public Policy estimated that more than 75,000 homes in Southeast Texas were flooded during and after Hurricane Harvey, although that number is “likely” to double when the final assessments arrive.
First Service CU and eCU Mortgage offer a number of hurricane-related loan products, including loans with discounted rates to replace vehicles damaged or destroyed by the hurricane, and mortgage programs to help borrowers purchase new homes or rebuild their existing properties.
Ken Canon, mortgage lending manager at the $565 million Members Choice Credit Union, also based in Houston, said his office always sees an increase in calls and questions from members in need of funds for home repair after natural disasters such as the recent hurricane.
Members Choice CU is currently offering a Step Loan with an initial 2.99 percent interest rate for the first year – thereafter, the rate ‘steps” to the normal rate for the remainder of the term.
“We are also offering ‘skip a payment’ or loan modifications for members who already had a loan being serviced by us,” said Canon.
Most members, he added, choose a closed-end, fixed rate home equity loan with a 10- or 15-year term.
Lone Star State’s HELOC hurdles
A proposition on the ballot in the upcoming election could change the state’s strict underwriting guidelines governing home equity loans, but until that is passed and goes into effect, Adams cautioned that her company is more likely to offer home improvement loans, which do not have to comply with such stringent rules from the government.
“We have seen a small increase in demand for home improvement and home renovation loans from our members and customers, and expect to receive more demand for at least the next year or so,” she said.
Such loans will be offered in conjunction with Fannie Mae’s HomeStyle mortgage loans and the Federal Housing Administration’s 203-K rehabilitation loan programs, she added.
Echoing Adams, Canon noted that home equity lending in Texas – including cash-out refinance loans – are burdened with compliance hurdles that make it difficult for lenders to offer help to potential borrowers.
For example, Canon said, one requirement calls for the lender and the borrower to sign an “Acknowledgement of Fair Market Value” on the day of closing, attesting to the value of the subject property on the very day the loan is consummated. “Also, the value must be ‘as is’ and cannot be ‘subject to improvements,’” he said. “Finding the FMV of a property that has been damaged by a natural disaster is extremely difficult. We typically only require an Automated Valuation Model report for home equity loan amounts under $100,000, but the AVM system cannot assess whether the property was damaged during the disaster.”
The AVM report, Canon explained, provides a value for undamaged property, “and if we have actual knowledge that the property was damaged during the disaster then we are out of compliance by signing the Acknowledgement of Fair Market Value, based on the AVM Report.”
Moreover, the option of obtaining a full property appraisal doesn’t help either as the appraiser will not provide an “as is” property value on damaged property. Thus, the value will be “subject to” necessary repairs.
“Many times we are extremely confident that the value and equity is there, and we certainly want to help our members whose homes were damaged, but complying with Texas law can tie our hands behind our backs,” Canon added.
Further relief available
CU Members Mortgage, a Dallas-based CUSO, is also expanding its mortgage portfolio to include the Fannie Mae's HomeStyle loan to help consumers suffering as a result of Hurricane Harvey.
The CUSO, a division of Colonial Savings F.A., a federally chartered thrift, said special features of the loan allow members to borrow up to 95 percent loan-to-value, based on an “as completed” value,and improvements can make up to 50 percent of the appraised value.
CU Members Mortgage said that compared to a home equity line of credit or other short-term financing options, this type of loan provides a “better rate” for those needing to renovate during this “tragic situation.”
“Ultimately, it’s a better loan for renovating, and we want to make sure members have options,” David Motley, president of CU Members Mortgage, said in a statement.
CU Members Mortgage also indicated that it hasn’t "typically" provided this type of loan product in the past, as they are a “higher risk loan” for lenders to originate.
Relief coming soon?
Among the provisions up for a vote next month in the proposed Home Equity Loan Amendment to the state constitution, are changes in the state’s home equity borrowing system. Among other things, the amendment would lower the cap on home equity loan-related fees from 3 to 2 percent (while excluding certain additional fees from counting towards this cap); allow home equity loans against agricultural property; allow the refinancing of a home equity loan with a purchase money loan; and allow advances on a home equity line of credit as long as the principal amount remains below 80 percent of the fair market value of a borrower's house.
Canon said that these proposals are “a step in the right direction,” but that these changes would not affect the fair market value issues involved when a property is damaged during a natural disaster.
“One proposed change is removing the prohibition against home equity loans for properties with an agricultural exemption,” he cited. “We have had to either turn down members who have agricultural exemptions on their properties or require them to survey out an acre around their home and keep the remaining acreage as ag exempt.”
The cost of such a survey, he lamented, is “sometimes cost-prohibitive and we were unable to assist many members due to this rule.” Removing this prohibition against ag exempt properties just “makes sense,” he declared.
With respect to the proposal to cut the 3 percent cap on fees to 2 percent, Canon noted that many lenders opted out of doing the smaller home equity loans from fear of being out of compliance by exceeding the cap. “This proposed change should make it easier for lenders to offer the smaller home equity loans at competitive rates and not have to cover the fees,” he elaborated.
Storms over the Sunshine State
Meanwhile, across the Gulf of Mexico in Florida. GTE Financial, a $1.9 billion institution based in Tampa, developed a Home Equity Line product in anticipation of this summer’s storms.
Shamus McConomy, VP of Small Business and Consumer Lending at GTE Financial, explained the product is capped at $10,000 and requires the member to have a maximum 80 percent loan-to-value based on their valuation process.
“We were not requiring any inspection,” he said. “We based this underwriting philosophy based on three facts: the amount was relatively low; the cushion in the LTV would in most cases cover any devaluation caused by damage; and the damage would be short-term and the money would be utilized to facilitate repairs thereby restoring our collateral value.”
However, McConomy indicated that GTE Financial did not see a large increase in home equity loan application after the recent hurricanes. “Fortunately, our primary markets did not experience the strongest and most damaging side of the storm,” he explained.
Nonetheless, McConomy asserted that GTE Financial had a “very robust” home equity portfolio throughout this year.
“We have attributed this mostly to home values increasing and first mortgage rates increasing as well,” he elaborated. “Whereas many people in the past could get a first mortgage refinance with cash-out for an interest rate comparable or lower than their current rate, now rates might be higher and it makes more economic sense to use a home equity product.”
What about the next hurricane?
It might make sense for homeowners living in hurricane-prone regions to prepare for the next inevitable destructive storm. However, it appears most people are not following this practice.
Members Choice’s Canon indicated he has not yet encountered an applicant proactively seeking a home equity loan in anticipation of the next hurricane or natural disaster, but noted that it would “certainly eliminate” a multitude of problems once the property has been damaged.
But GTE’s McConomy said that he thinks there is always “a fraction” of the home equity portfolio at his credit union that are used as “emergency funds” for such a calamity. “The recent spike in storm activity will encourage more people to establish access to these funds prior to next hurricane season,” he added.
