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How to Increase Long-term Margins Post Pandemic

The pandemic caused widespread hardship for consumers and heavily impacted how credit unions (CUs) needed to operate. Members increased their savings withdrawals and requested deferrals on loan payments and avoided taking out new loans. To provide relief for members, CUs cut fees including loan and application fees.

At the same time, thanks to low interest rates, CUs experienced significant loan growth through an increase in refinances and purchase mortgage loans. Even with all the work and resources spent on originating the loans, CUs were not able to return much of the profit back to their members because the loans were ultimately sold on the secondary market.

Additionally, because of the pandemic, many consumers switched to more of a savings mindset. As they reduced the number of loans they took out, deposits were up six times than average. While CUs were leveraging the cash refinance opportunity, many consumers were using that money to pay off credit card or auto loan debt, or any kind of loan, many from, you guessed it, CUs. The result produced an unbalanced portfolio. All of these factors have taxed credit union earnings. Even as many CUs stayed afloat, there is still a long way to go before increasing long-term margins post-pandemic.

If CUs continue operating as they are today, they will pay six times more the amount of interest, collect less interest and only do it for a one-time nominal loan origination fee. This is not a sustainable way to create revenue or maintain member loyalty. As interest rates start to rise, the number of refinances is expected to slow down this year, taking refinance options off the table as a main source of revenue and loan volume. CUs need to diversify their portfolio, and fast, to remain competitive.

This is why CUs should look into offering home equity loans. According to the Mortgage Bankers Association’s 2020 Home Equity Lending study, originations are expected to increase modestly this year. As home values are rising, interest rates are still attractive for homeowners to tap into their equity. There’s a great window of opportunity for homeowners to reinvest in their homes for home improvements or debt consolidation. Since there is a tight housing supply, CUs can help members through home equity loans to expand or renovate their homes to fit their needs. At the same time, CUs will enjoy more diversification in their portfolio making it a win-win situation.

Instead of repacking loans such as refinances, CUs gain the long-term value of home equity loans, which is greater than a mortgage or refi. Portfolio lending will be key this year and into 2022, so CUs need to capitalize on this to stay competitive.

When tapping into the home equity lending space it is important to ensure the member experience never falters. CUs are increasingly facing competition from fintechs who are providing direct services to members because  they can quickly meet  demands. Members generally turn to CUs because of better interest rates, and they stay because of a great experience such as having an on-time closing increases loyalty. Getting into the home equity business does not mean buying a new LOS or installing new software – it can be small changes such as ordering an automated valuation model instead of an appraisal, which NCUA says can be used for loans under $400,000.

Leveraging technology is important to streamlining processes. Using automated and intelligent workflows can reduce the time it takes CUs to process real estate and home equity loans, reducing the origination by 60%. Finding the correct solutions to reduce manual data entry and errors can empower CUs to go above and beyond in providing the personalized experience and speed their members’ desire. Fintechs offering consumer loans and other competition are already doing this, so it’s time for CUs to enter the space of redefining member experiences and expanding lending options. 

Forward thinking credit unions are already tapping into home equity, when will you?

Allen Jingst is SVP at LenderClose, a fintech company that provides credit unions and community banks with the technology needed to become leaders in lending. The newest feature on the platform, Home Equity Express (HEx) allows lenders to spend less time per home equity loan and provides a clear to close in two days.

This content is for CU BUSINESS eMagazine , THE TEAM BUILDER (GROUP SUBSCRIPTION), and Special Deal: 2 websites members only.
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