Technology Helps Fuel 28% Increase In Home Equity Loans At Navy Fed

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Navy Federal is expecting to close $2.3 billion in home equity loans this year, 28% more than last year. Rising rates for first mortgages are helping to fuel the increase.

If the forecast is on target, equity loans will nearly triple the $823 million in lending during 2003, said Cliff Mower, NFCU's manager of equity lending for the past 17 years. NFCU closed $1.8 billion in equity loans last year, he said.

Rising rates for first mortgages from recent 40-year lows as well as nationwide increases in home values helped take equity loans to current record levels, he said.

Rising first-mortgage rates helped because they compete with equity loans, he said. Homeowners can choose to refinance first mortgages or take equity loans when they borrow on their equity.

"From 1997 to the first quarter of 2004...rates were very low, so many people took cash out and refinanced their mortgages," he explained. "In the second quarter of 2004 first-mortgage rates started to go up again from about 5% to about 6%. And we reduced the equity loan rates."

Starting in the second quarter of 2004 home owners could either refinance first mortgages at a 5.5% rate or take closed-end loans for a fixed-term rate at Navy Federal for as low as 4.9%, he said.

Navy Federal, the biggest credit union in the U.S. with $22.8 billion in assets and 2.5-million members, offers equity loans for up to 15 years and equity credit lines for up to 10 years with a cap at $350,000 per loan.

Automated Valuation Models

Since 1998 Navy Federal has been using automated valuation models to support equity lending that can value a property in "less than 10 seconds," Mower said. In 2004 Navy Federal started using a model called the Home Value Estimator that "eliminated the need for about 90% of the property appraisals we used to require," he said.

"By reducing our reliance on appraisals, the Home Value Estimator has enabled us to speed up the loan process dramatically while reducing the cost of valuing properties," Mower said.

To help pull greater demand, the loan programs were promoted through advertisements in areas of high-member concentration in Virginia, Washington D.C., Southern California and northern Florida, he said. While the rate for home equity lines of credit has been as high as about 5.9%, NFCU has offered six-month introductory rates of 1.9% to attract borrowers.

"We plan to change the features of the program to make it more desirable," he said. NFCU started offering standard secondary mortgages in 1981 and home equity lines of credit in 1987.

"We sort of anticipate that first mortgage rates will increase a little more in the long run and result in higher demand for our equity loans," Mower said.

Most CU CEOs anticipate interest rate increases, according to CEOs that took part in a December nationwide survey by Dallas-based Southwest Corporate FCU.

In 2003 the number of Navy Federal equity loans was 19,947 at an average of $41,000 per loan. As home values rose, the average equity loan rose to $48,000 last year, when 37,678 loans were signed.

Last year 60% of all NFCU equity loans were fixed-equity and 40% were home equity lines of credit.

According to SMR Research Corp, a New Jersey market research firm, total home equity borrowing in the United States, including banks and other financial institutions, amounted to a record-high $431.3 billion last year, the Wall Street Journal reported. It was a 35% increase year-on-year, it added.

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