Two for the Money

EV lending is especially important in California and for financial institutions like $5.8 billion Wescom Credit Union, based in Pasadena. “Last year, 37% of our auto loans were for EVs,” reports CUES member Jeff Smrcka, VP/consumer lending. That’s ahead of the 27% across California, which leads the nation in EV loans. 

All of Wescom CU’s auto loans are direct. “We only do direct financing,” Smrcka reports. “Our members don’t have to deal with the pressure of ancillary product sales and dealer mark-ups.” Eighty-eight percent of those loans are made to members ahead of their purchases, and 12% are to members refinancing loans originally made through dealerships, he explains.

Patelco CU also makes a few direct Tesla loans, Mendez reports, where a member comes in and takes out a loan and then uses the money to buy the Tesla.

Of the EV loans Wescom CU made last year, about 80% were for Teslas, Smrcka reports. “They’re by far the market leader in California, but their share is starting to shrink as other brands enter the market. I expect their share in our portfolio is heading for 75% by midyear 2024.”

There aren’t a lot of Tesla sales yet in Wisconsin, notes CUES member Shawn Redman, chief lending officer of $607 million Heartland Credit Union, Madison, Wisconsin. The closest showroom is Chicago. 

Nevertheless, Redman is interested in what Origence is doing. “It’s a big feather in their cap,” he says. “They deal directly with Tesla. Then they see where the borrower lives by ZIP code, and they could offer us loans within our market. We’re not doing it yet, but we’re considering it.”

Wescom CU likewise has listened with interest to an Origence presentation but for now the credit union is sticking with its direct-only strategy. “We don’t see a need to open a new channel at this time,” Smrcka says.

It’s important to note that EV technology is changing rapidly, and EV buyers are tech-savvy and tend to be tech enthusiasts. This makes them a distinct demographic that has high credit ratings and favors the latest models—and they steer clear of used EVs. “The prices on used EVs are great,” Smrcka says, “but buyers are not jumping in.”

Making Home Equity Useful

Home equity lines of credit continue to evolve from a mortgage add-on to a core product—perhaps the core lending product. The safest borrowers are members sitting on a large amount of home equity they don’t want to liquify by refinancing at today’s higher rates. That equity and access to it are becoming the foundation of financial wellness for members who qualify.

Other lending products are limping. Credit unions got a surprise feast in 2022 by helping members refinance their homes at astonishingly low rates. They capitalized, but the moment has passed, notes economist Bill Conerly, head of Conerly Consulting LLC, Portland, Oregon. 

The best thing going for credit union members today, suggests Omar Jordan, CEO of Coviance (formerly LenderClose), West Des Moines, Iowa, is their home equity. Using home equity loans to consolidate debt makes a lot of sense. 

HELOCS are the most requested loan product today, Jordan reports. The sharp spike in interest rates has brought a shift from using home equity loans to take on new debt for home improvements to using them for debt consolidation. Members are also tapping their equity to pay off student loans.

When consumers spend more than their income, they run up credit card balances, which carry high rates if consumers can’t pay off the balances monthly, says CUES member Jenny Vipperman, president/CEO of $3.7 billion ORNL Federal Credit Union, headquartered in Oak Ridge, Tennessee. “This creates a need for debt consolidation, and HELOCs are an effective way to do this.” ORNL offers HELOCs with floating rates.

HELOCs are proving remarkably flexible. For CU members wanting to buy a boat or an RV, Conerly points out, HELOCs can be a financing alternative to a vehicle lien.

In the frenzied market of 2022, Conerly says, it took cash offers to buy a short-in-supply home; a lot of baby boomers helped their kids by taking out a HELOC, advancing the cash to the kids, and then having the kids take out a standard mortgage and repay the parents once the dust settled.

HELOCs worked better than bridge loans in that market for people who needed to pay for a new home before they could sell the old one, Redman reports. A bridge loan was too slow.

With such uses, HELOCs have become a hybrid loan, Jordan suggests. Technically a HELOC is a mortgage loan, but it should be treated more like a car loan. Consumers can get approved for a car loan up to $150,000 in minutes, he notes. “Why should they have to wait 30 days for approval for what’s really a safer loan?

“That’s the experience CU members are seeking in fintechs.” 

The Member Service Issue

In theory, HELOCs are a crown jewel in a credit union’s member-service array. That’s certainly the thinking at Wescom CU. HELOCs are a fantastic product, enthuses Smrcka. “The equity is there. It can unlock liquidity simply and efficiently.”

HELOC financing is particularly member-friendly at CUs like Wescom that absorb the costs and offer them free to members as a stand-by facility. Members pay nothing unless and until they draw on the line, he explains, and then they pay only interest on the amount and for the time funds are drawn.

So, isn’t having a HELOC a no-brainer for members who have equity? Smrcka thinks so. It makes sense for every member with equity to have one just in case, he says.

Not every Wescom CU member has a stand-by HELOC; it takes some time and effort to set one up, and members may be proud to own their homes free and clear. But processing has been streamlined at Wescom, and word of mouth is leading more members to set up stand-by lines, Smrcka reports.

Wescom CU gives members the option to tap a HELOC for a variable-rate draw and then convert that debt into fixed-rate. “They can convert and lock in their balance at a fixed rate if they wish,” Smrcka explains.

But there can be a downside. HELOCs are touted as a great tool for debt consolidation. That’s a clear benefit to a member—a single, lower-rate, visible debt balance to target ... unless the member uses the HELOC to restore card capacity and goes on piling up even more debt.

That can happen, Smrcka concedes. “We use education to encourage them to just use one or two cards and pay off the balance every cycle. It’s a chance to encourage them to save.”

That nice-guy free-HELOC approach, widely practiced, is drawing criticism from analysts like Jordan. “Credit unions falsely assume they serve members best by charging the lowest interest rate in town and assuming all the fees involved in originating the line,” he says. “Most members want to maximize the equity in their homes in the fastest, most painless way possible.” 

Credit unions hoping to maximize HELOC opportunities need to address fees, Jordan says. “A lot will offer free lines as a member service, but they are expensive to originate—anywhere from $250 to $400 in cost to the CU.” 

Like no-fee credit cards that sit in a drawer, HELOCs can be dead weight on the income statement. He cites the case of one $5 billion CU that originated $70 million of HELOCs in a quarter, only 30% of which was drawn.

Credit unions need to recognize HELOCs as the cornerstone of financial wellness, Jordan asserts, and charge a fee for a package that members will accept. There can be an annual maintenance fee. There can be a minimum draw or minimum balance.

Jordan also thinks that conservative underwriting is holding credit unions back. While most CUs apply 80% and 90% loan-to-value lending standards, fintechs are attracting CU members with 100%, even 133% offers. “Fintechs are entering the HELOC and home equity lending space at a pace we have not seen before,” he notes. “Some of the largest lenders, like Rocket Mortgage and Loan Depot  are now offering HELOC loans.”

Not everyone agrees. Looser underwriting like 100% LTV works, Vipperman acknowledges. “It can bring in more loans. Should CUs do it? No.”

Heartland CU sticks to 80% LTV unless the loan is to “a rock-solid borrower,” Redman reports.

Credit unions are overly cautious for two reasons, Jordan explains: They’re squeamish about having a second lien position, and they worry about liquidity pressure. The second lien issue is real, but limited housing supply and high valuations are also real and pretty stable, which should bring comfort to CUs. 

The liquidity problem is easily addressed because HELOCs are pledgeable assets that CUs can take to the Federal Home Loan Banks for cash, Jordan points out. 

HELOCs are often variable-rate, he notes, but there’s a case for making them fixed. “If I were a CU CFO, I’d lock in a rate of 10% to 12%. When the cost of funds comes down, and it will, I’d lock in rates on every HELOC that comes in. It’s not predatory. The member gets comfort, too, with fixed rates. It would set me up with asset/liability stability in the years ahead.”

HELOCs work well in shifting, opportunistic situations, but CUs need to take the long, strategic view, Vipperman urges. “The goal needs to be what we want our portfolios to look like in the future and how we are going to get there.”   

HELOC Securitization 

Home equity products have become popular and mainstream enough to support a market for securitized transactions that are originated by mortgage bankers and sold to financial institutions. 

CUES Supplier member Spring EQ, Conshohocken, Pennsylvania, originates, processes, underwrites and funds loans—dealing directly with homeowners or third-party originators. “We’re the largest originator of home equity products that is not a bank or credit union,” says Chuck Vaughn, VP/capital markets.

The company was formed eight years ago, Vaughn reports, by a team of savvy mortgage industry professionals who expected rates to rise along with investor demand for home equity products. When the interest rates began a sudden and dramatic increase in March 2022, Spring EQ was ready. 

Currently, Spring EQ works with investors that include credit unions, banks and Wall Street firms. Spring EQ can deliver specific securities that match the credit requirements of individual investors. For CUs and banks, that usually means credit profiles around 70% loan-to-value, 735 FICO scores, and 35% debt-to-income. Yields now are in the 7.5-9% range.

Now that 82.4% of homeowners have mortgage rates below 5% and 62% are below 4%, Spring EQ believes that the home equity market will remain strong for the foreseeable future.

“My goal,” Vaughn says, “is to help CU and bank clients manage yield, duration and concentration on their balance sheets.” cues icon

Richard H. Gamble writes from Grand Junction, Colorado.