Home mortgage banks are expanding further into the domain of commercial bankers.. Now they are purchasing home equity lines of credit from other originators.
Countrywide Credit Industries began its wholesale operation for correspondent lenders on Tuesday. Household Financial Services and Residential Funding Corp. are also recent pioneers in the business.
Lenders say this is perhaps the most competitive and rapidly expanding wholesale market in home lending, It's viewed as a new product to offer to a large, underused customer base at mortgage banks now that their home loan refinance business has withered significantly.
"Mortgage bankers, in particular. are looking for other products right now for originations systems," said William Robinson, a senior vice president at Pomona. Calif.-based Household Financial.
Household and other wholesalers buy the home equity lines of credit mainly from mortgage bankers. The wholesale lenders service the lines of credit.
Both Household and RFC will begin securitizing the lines of credit they buy Wholesale within the next six to 12 months.
"It's an arena that the commercial banks have had for themselves for the last 10 years," said Mary C. Tingerphal, a vice president at Bloomington, Minn.-based RFC. "Now they have competition from another sector Of the market."
The risk for wholesale lenders is that the borrower who is sold the line of credit will not necessarily use it, said David A. Olson. a Columbia. Md., publisher and home equity consultant.
According to Mr. Olson, borrowers draw, on average, about 55% of their Credit line.
Between 10% and 15% of the lines are never used. He called this a "stumbling block" that has restrained this market in the past.
RFC first began offering lines of home equity credit through its correspondents in the spring.
It now buys the credit from about 45 originators, Ms. Tingerphal said.
She said RFC would introduce several new wholesale products in the next few months. including closed-end home equity loans and fixed-rate lines of credit.
The subsidiary of GMAC Mortgage Corp., Elkins Park, Pa., contracts out the servicing to Bank One Columbus in Ohio. It offers the borrowers a home equity Visa card that allows them to draw on the line of credit as if it were a debit card.
RFC makes available a dozen or so variations on the home equity line of credit, including a line equal to 100% of the equity in the home in selected cases.
Less than 5% of the lines of credit RFC purchases have 100% loan-to-value ratios. Ms. Tingerphal said.
She said the company expects to originate $10 million a week of home equity lines of credit by yearend.
Household Financial launched its wholesale operation this summer. It services $1 billion of home equity lines of credit and some other financial products.
Mr. Robertson, the senior vice president, said the lender expects to purchase $500 million worth of lines of credit per year.
Residential Funding Corp. and others are buying home equity lines of credit.
How it works:
Mortgage banks grant home equity lines of credit to borrowers. The wholesaler purchases the line of credit, then sells it in the secondary market even before the borrower has used it.
Between 10% and 15% of these lines of credit are never used.