How credit unions can crush the HELOC game

There is no denying that home equity loans and lines of credit are the name of the game for credit unions right now. As of May 17, 2024, year-to-date home equity originations have already surpassed the total number of originations in 2023. But guess what? It is the name of the game for major banks and non-bank lenders as well, who, let’s face it, are pretty good at marketing and loan production.

Do I believe credit unions should just give up loan production? Absolutely not. We are very fortunate to work with incredible credit unions like Patelco Credit Union and Tower Federal Credit Union who boast a powerful loan production operation, particularly in home equity. When it comes to creating new lending products, credit unions have a massive advantage over banks and an even bigger one over non-bank lenders.

Given your local nature, smaller size, focus on members, and almost exclusive focus on consumer lending (as opposed to commercial lending), credit unions have the ability to leverage their balance sheet to create unique creative consumer and residential lending products, compared to larger financial institutions. This is your superpower.

We have seen large banks take 12-24 months to go live with a new lending product. How long does this process take for the average credit union? 4-8 months.

In theory, this advantage that credit unions have can be shared with similar-sized community banks. However, from our experience, the balance sheets of community banks are usually heavily focused on high-yield commercial lending, making their residential lending focus almost exclusively on salable products, which makes it even more difficult to be able to offer up-and-coming loan products in a timely manner.

While big banks have the appetite and desire to grow their residential lending business and come up with creative products, their size and consequent regulatory structure make it so much of a burden that by the time they are ready to go to market, most are already behind. This is where credit unions stand out.

This advantage can be leveraged across many lending verticals and, as proven with auto lending, offering attractive loan products has been proven a great way to grow and attract great members. However, in this article, I want to focus on one specific loan product that is up and coming, is highly differentiated in the market, is a game changer for members, and, unlike indirect auto lending, does not require you to offer unsustainably low rates. This is known as a Renovation HELOC.

What are Renovation HELOCs?

Renovation HELOCs are structured similarly to conventional home equity lines of credit from a credit underwriting perspective. Their unique feature is that they are designed exclusively for home improvements and underwritten based on the after-renovation value (ARV) of the member’s home.

Similarly to traditional construction loans, this enables members to significantly grow their borrowing power (3x more than traditional HELOCs, on average). Unlike traditional construction loans, these loans are junior liens, which means members are not forced to refinance and are able to hold on to their existing historically low rates.

From our experience, Renovation HELOCs have been proven to be extremely powerful for members across the nation. Millions of households are sitting on rates in the 2-3% range, making it unappealing and oftentimes unaffordable for them to move to a new home. Therefore, staying put and renovating is the next best, and only realistic, option. This includes everything from larger kitchen and bathroom remodels to room additions and building accessory dwelling units.

Given the larger nature of these projects and the rising cost of home improvements, millions of households do not hold enough equity in their home to finance this with a conventional home equity loan, which will offer them 80% LTV on average, and they cannot access a construction loan that does not require them to refinance.

This sounds great. But operationally, how do I pull this off?

To be able to offer Renovation HELOCs in a way that is risk averse, there are several steps that credit unions who offer this product take to ensure that they are protected from the renovation and contractor risk and that the home will increase in value enough to justify the new loan-to-value ratio once the renovations are completed.

Among other things, this includes vetting the member’s contractor to ensure they are licensed, insured, and qualified, vetting the renovation proposal and plans, and understanding the after-renovation value (ARV) of the home. This also includes ensuring that all draws are tied to a predetermined milestone schedule and disbursed directly to the contractor, as well as reviewing each of those draws to make sure the work has been completed according to expectations.

Most credit unions that offer a product like this leverage partnerships with fintechs to handle this process and ensure it is done in a risk-averse way but is still user friendly and cost effective for the member and their contractor.

How will I market this? 

Some of our credit unions are focusing on marketing this themselves to their existing members through their existing sales channels as an extra arrow in their quiver, although most credit unions that we come in contact with see this product as an opportunity to attract new members and work with indirect lending channels, such as fintechs like Housetable, similar to how some credit unions look at indirect auto lending, as mentioned earlier.

For the credit unions who are already set up to work with third-party mortgage originators (TPO), offering a unique and in-demand product like this can be a great way to grow and add value to that TPO network. We have also seen several credit unions who were not set up to work with a TPO prior to offering Renovation HELOCs begin to do so with this product as they saw an opportunity arise.