LAS VEGAS — Even in this beaten-down housing market some home owners actually have equity, meaning home equity loans — a lending category that largely was forgotten in the aftermath of the housing crisis — are coming back.
Along with some new issues.
First is awareness. In many cases home owners are so used to bad news they do not realize the value of their house now exceeds their mortgage balance. CUs have to scour their rolls to discover these opportunities to make new loans.
Second is valuations. Anecdotal evidence suggests appraisers are being extremely conservative in this brave new real estate world of increased regulatory scrutiny, leading many home owners to complain their values are being understated.
That leaves many credit unions stuck in the middle, say industry insiders and analysts, wanting to make their members happy while being financially prudent.
Las Vegas Comeback
Steve VanSickler, chief credit officer for Silver State Schools Credit Union, and president/CEO of Silver State Schools Mortgage Company, said he has seen a recent uptick in home equity loan applications, even though the $637 million-asset CU has not initiated any specific marketing campaigns to promote them.
"What we do see and track for allowance for loan loss purposes is fewer and fewer of our residential real estate loans, both senior and junior liens, are underwater," VanSickler said. "Another factor is home values have returned such that some families do have lendable equity."
Judy Dodier, SVP home financing for $544 million Align Credit Union in Lowell, Mass., said because having equity is "really new" in a number of markets, credit unions should examine their home equity products carefully.
"We try to piggyback on the first mortgages we hold," Dodier said. "If there is equity there, we want to reach out. We cover the cost of an appraisal for a home equity line. It is worth it because the AVMs [automated valuation models] that come up through public records are not strong. An appraisal will weed out bad data. Zillow is only OK, so we have an AVM service we belong to through the Massachusetts Credit Union League that is a little more in depth."
Little Interest A Year Ago
Curtis Cole, home loans manager for $307 million Southwest Airlines Federal Credit Union, noted his institution is based in Dallas, but has members across the nation.
That gives the CU the advantage of being in the Texas market, which did not see major peaks and valleys of real estate prices, but it also lends in markets that were more volatile.
"Across most of the country there was little activity in home equity lending even a year ago," Cole said. "But now we are seeing more activity, even in Las Vegas, Arizona, California and Florida — the markets every lender got burned in. We look at loans in those areas a lot more closely. We want to give our members what they need and desire, but we are still licking our wounds from a few years ago."
Texas has some "very unique" home equity rules, according to Cole. For example, the loan-to-value ratio cannot be over 80% combined between the first mortgage and any second. The equity loan cannot be more than 50% of the property, but the minimum draw is $4,000. Also, a home equity loan cannot be redrawn more than once a year.
The qualified mortgage rule has added some wrinkles. Cole said previously if the tax assessment was high enough to show equity that was considered sufficient. Today, the lender must look closely at income and assets, and the value of the property. "All mortgages require more disclosures and documentation, which costs more money," he said.
There are companies that use logarithms and state records to determine if there is available equity, Cole said, adding he thinks more players will return to the marketplace as conditions continue to get better.
"There are ways to data mine, combine home values with credit score lists," he noted. "We are going to do a guaranteed offer this summer with a home equity product. We will look at members who have mortgages on the books, and we have a third party that has a pretty accurate read on the current value."
Christine Schwarz, VP of real estate lending for $378 million USC Credit Union in Los Angeles, said the market in her CU's service area is rebounding.
"In Southern California we are seeing values coming back quite nicely, which is allowing members who obtained low rates when they refinanced to borrow to make home improvements or pay for education expenses."
USC CU has seen home equity loan apps increase "dramatically" compared to the last couple years, Schwarz noted, almost 300%.
In 2011-12 production was very low, in large part because home owners simply did not have any equity. Between 2012-13, the CU went from 74 applications to 221, the majority of which were during the second half of the year.
"For loans in our pipeline we use services that help us identify those homeowners who might qualify for a home equity loan," she said. "We can tell them we have a program that is a good fit. We want our phones to ring, because we know if people call us we have a great product for them."
Insurance Issue
Silver State Schools' VanSickler, who recently was named chairman of the Nevada Mortgage Bankers Association, said no discussion of the return of home equity lending would be complete without examining the insurance side. "I believe some of the mortgage insurance companies are looking to get back into insuring junior liens, which would aid borrowers in having more lendable equity by allowing credit unions to write equity loans above an 80% loan to value," VanSickler said.
The typical mortgage insurance for equity loans is "pool" coverage, such that a credit union needs to write a good amount of covered loans for the period — in most cases a calendar year, according to VanSickler.
That means instead of having 15% coverage on individual loans, with pool coverage a lender has 15% coverage on the entire pool. Therefore, if a CU writes $1 million of covered loans in a one-year period, it has total coverage of $150,000 to use if any covered loans have a loss. If the institution takes the coverage loss limit on one or two large loans that go bad, then the rest of the loans in that pool will not have any further coverage.
"If a credit union uses pool coverage then hopefully it is tracking the property values on the residential real estate loans on its balance sheet on a periodic basis, or at least applying the federal housing price index changes to the original valuation for each loan," he said. "In this manner, the lender can gauge the risk and may not have to worry about having uncovered loans. Or, the lender could cancel the insurance and cost as it knows the risk from a value standpoint has been eliminated."
Christine Busheme, VP of mortgage lending for $1.6 billion Fairwinds Credit Union, said new rules that were put in place in 2010 have made appraisals more costly, made timelines longer and have made the process more cumbersome overall.
What has not changed: appraisals are professional opinions of the value of property, Busheme noted.
What has changed: the manner in which an institution may seek to question or dispute that opinion. "The appraisal guidelines have gotten very complex," she said. "There have been hundreds upon hundreds of pages issued by multiple regulators. The upshot of these new rules is the lender cannot order an appraisal, the lender cannot have direct contact with an appraiser, and the lender cannot subjectively reject an appraisal."
In the past if the value of a property under consideration for a home equity loan was seen as low, lenders could send an e-mail directing the appraiser to certain comparables, Busheme noted, adding this practice is no longer acceptable. She said what most lenders have done is set up a relationship with an appraisal management company, or AMC.
An AMC does continuing due diligence on its pool of available appraisers in a given market. When a request for appraisal is made, the AMC randomly assigns it to one appraiser. On an ongoing basis an AMC checks appraisals for any material errors, Busheme explained. "The focus today is on the independence of appraisers," she said. "If there is a dispute but there is no material error of fact, the value does not change. This has led to a more conservative approach, but it mitigates a lot of the risk for valuation."
With that said, Busheme noted appraisers have loosened up recently. She said she has seen appraisers moving more toward the perception of value by the borrower, "at least in Central Florida, where all counties have had significant appreciation in the last several months."
USC CU's Schwarz said her credit union uses an online valuation site that offers regular updates. She noted this is particularly important in a market such as Los Angeles, in which crossing a major boulevard can make a $200,000 difference in certain areas. "We continually value properties every month," she said. "If there is an evaluation we feel needs more depth, we consider doing a drive by."
Schwarz said she believes appraisers are doing a better job of supporting "what is really happening" in the market.
"They have gone through hardships and have greater accountability now," she said. "Everybody wants to be able to do the deal, but there are times values cannot be supported. In those cases we look at what other options are there. The online sites are a guide, but comparables are more important. Especially properties that are similar. To get a real picture of value, go to local real estate agents and ask what the home would bring on the market."
Southwest Airlines FCU's Cole said the meltdown in 2007-08 led to the federal government "jumping on" inflated appraisals. "And rightly so," he declared. "No one had ever really held appraisers accountable for how they evaluated a property. As in many industries, there are good appraisers and bad appraisers out there."
If a lender used the same appraiser over and over, the lender had an influence over that appraiser, Cole continued. Because of changes the appraisal has been taken away from the mortgage department, which he said is a "big shock" for a lot of credit unions. "After the meltdown and everyone at the big banks was getting sued left and right, the appraisers were targeted," he recalled. "They got looked at very hard by the federal government. The natural reaction is to become more conservative. As the market has started to come back, even though the prices people are willing to pay are up, appraisers are hesitant to give full value. They want to keep doing appraisals tomorrow."
Cole said one of the biggest challenges occurs when there are no sales in the same neighborhood and the appraiser has to go further out. But the main issue is emotion. He said people frequently forget mortgage lending is not just a business transaction, there is a lot of pride in home ownership.
"Everyone feels their house is worth more than any other house on the block," he said. "If the appraisal is low, people feel insulted. We had a case where the appraiser did not have access to recent sales, and the number was really low. The owner took the comps to the appraiser and got the value up. It is all about the facts — comparing similar houses in a similar time frame in the same area."
While the bulk of Southwest Airlines FCU's business is in the Dallas metroplex, once or twice a year it is asked to write a mortgage in Las Vegas. Because Cole does not have a relationship with an appraiser in Las Vegas, and he does not want the other party picking an appraiser, so he uses a national appraisal management company.
"The company has its list of approved appraisers. The process has pluses and minuses — I have lost all contact with the appraiser, so we do not know what is going on until it comes in. But the management companies have their own quality-control standards."
Silver State Schools CU's VanSickler noted credit unions have choices in the valuation tool they use when writing home equity loans, such as a drive-by appraisal, a full interior-exterior appraisal, the assessed tax value by the county assessor, or an automated valuation methodology (AVM).
With AVM choices, "you get what you pay for," he quipped. "You can use free resources such as Zillow, eAppraisal, or something provided by a title insurer as an added-value product," he said, noting Silver State Schools CU uses a fee-based AVM on its equity loans.
For $15, he said, SSSCU gets a report that rivals an actual appraisal with comparable sales and comparable listing mapping, and in many cases photos from the last sale listing, assessor property pictures and/or aerial images of the property. "Our provider for the AVM has increased pricing with greater depth, but we are very satisfied with the services delivered with the lower-end product," he said.
VanSickler pointed out NCUA has guidelines on the use of AVMs, including rules on validation of values. Silver State Schools CU tracks the statistical values of its AVM tools by pulling an AVM on the post-closing quality control process of purchase money first mortgages. "We want to know whether our AVM values are conservative or liberal in the values being returned," he explained. "This data allows us to potentially provide a higher LTV where the AVM values are shown to be conservative. Sometimes we can write an equity loan at 85% of AVM value instead of 80%."
According to VanSickler, many CUs are probably conservative with respect to valuation of equity loans due to a potential second bubble bursting. He said this is most apparent in areas where property values have recently increased, which could result in another decline in property values. "The better credit unions are at tracking residential real estate loan values, the better chance they will understand whether they need to be conservative in valuations or not."
