I’ve read a lot of headlines lately about banks pulling out of HELOC lending, and even a couple of credit unions. While we as lenders were complaining about the regulators clamping down on certain types of lending and other associated matters following the housing crisis – and it was a housing crisis – here we are doing just that. Were the regulators correct?
In some regards yes, but in the larger picture, no. And neither are these lenders shying away from serving consumers in need right now.
This economic downturn is not cause by the malfeasance of unscrupulous mortgage lenders or appraisers or ratings agencies or all the other manmade elements of the 2008 crisis. COVID-19 is a force of nature.
And hardworking people who seek financial stability should be welcomed with open arms by credit unions. Decades ago – and many still today – lend not on a credit score, but on character. Back then, your tellers on up to the CEO knew every person who walked in the door at your credit union. You knew their names and asked about their kids or their most recent vacation.
That is still possible today, not just in the branches, but also in the virtual world. The data exists. We can know they have thousands of connections on LinkedIn, which makes it easier for them to network for a job should they lose the one they have. We can know they’ve worked in the same place for a decade and lived on the same tree-lined street.
I’ve recently engaged with a project out of CalPoly-Pomona and Dr. Erkan Ozkaya to develop a process for better gauging a consumers’ creditworthiness – character if you will.
Erkan and his team of graduate students have identified two problems: 1) low-quality lead generation for HELOCs and 2) systemic bias in HELOC lending practices. Currently, he is working on point No. 1 to develop greater predictive measures to improve HELOC marketing ROI efforts
Consumers have a great opportunity for wealth building through HELOCs with credit unions’ financial guidance. The Wall Street Journal recently reported that less than 4% of consumers had a HELOC in Q1 2021, compared with about 8% in the years leading up to the 2008 financial crisis. According to Bankrate.com, despite the equity homeowners have right now, they’re not running to it like a piggy bank; the article cited an Urban Institute report that estimated home equity loans are only about 4.4% of total US home equity.
There is an untapped reserve of financial power in people’s homes that, when used prudently, can help them through this crisis or to invest in their futures. Equifax reported that for the week of June 21 only 270 HELOCs were originated nationwide, per Bankrate, versus 7,620 HELOCs a year prior. A 99% reduction!
However, and this is where part 2 of CalPoly’s research comes in, about 9% of consumers in the highest-income ZIP Codes had HELOCs available. 3X the lowest-income areas!
Who does this disproportionately impact? The very same people who have been hit hard by COVID-19, and very likely the school of hard knocks before that: minorities, single moms and others who are most vulnerable. The CFPB recently reported that 18% of the total population of mortgage borrowers are Black or Hispanic people, so there is great opportunity to help provide wealth-building HELOCs and other products that will help to create financial stability and end the cycle of generational poverty.I encourage you to review the CFPB report, Characteristics of Mortgage Borrowers during the COVID-19 Pandemic for more in-depth data. It’s fascinating.
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