(From Credit Union Journal) – After months stuck at home during statewide lockdowns, some consumers have decided it’s time to renovate. That could be a lending opportunity for credit unions.
Overall loan demand has slowed since the coronavirus became widespread earlier this year, leaving credit unions in search of interest-earning assets. Credit for members to make home improvements could be one avenue for deploying deposits.
“There are a number of people who have been at home now and they say, ‘Gee, we would like this and this would be nice,’” said Greyson Tuck, a board member of the law firm Gerrish Smith Tuck. “There are a lot of demand for the services of businesses like builders and tree trimming guys.”
Mortgage lending has remained a bright spot during the pandemic. In May, first mortgages ticked up roughly 16% from the same period in 2019, according to the July trends report from CUNA Mutual Group. That increase was largely fueled by consumers refinancing in order to take advantage of low interest rates.
However, other mortgages, including second mortgages and home equity loans, totaled $90.2 billion in May, according to CUNA Mutual data. That’s down about 1.8% from the same period a year earlier. Home-renovation loans can be done in several ways, such as a second mortgage, a cash-out refinance, or a home equity line of credit, sources said.
The Mortgage Bankers Association (MBA) recently completed a study, which hasn’t been released yet, looking at home equity lending. Borrowers tend to use money from this type of credit for a variety of purposes, but the group found that the primary reason was home renovations, said Marina Walsh, Vice President of Industry Analysis for MBA’s Research and Economics Department. Forty-one percent of respondents cited that as the reason for needing the loan.
Ardent Credit Union in Philadelphia has partnered with RenoFi, a fintech platform for home-renovation loans, to offer HELOCs for terms of up to two years. After the project is completed, the loan becomes a fixed term with a low rate for up to 20 years.
The $781 million-asset credit union recently officially launched the product after initially running it as a pilot program. The credit union has made 37 of these loans, including some currently in the closing process, over roughly six months and hasn’t run into any issues with credit quality yet, said Robert Werner, its President and CEO.
The typical loan ranges from $100,000 to $250,000. Ardent is offering the product to new and existing members as a way to attract new business.
“When we launched this product, we didn’t know that there would be a coronavirus and that members would be stuck at home,” said Werner. “That’s the whole concept of tapping into that equity to allow the homeowner to take advantage of that.”
There could be a few reasons members decide to renovate their current home rather than buy a new one right now, sources said. For one, consumers could be considering doing home renovations to take advantage of low rates.
There is also a low inventory of houses for sale. That would help the homeowner get more from the sale of their property, but they could then struggle to find another house to buy.
“The return on investment for an update or renovation depends on a lot of factors, but remodeling may be more affordable right now than purchasing a home with the same features,” said Francesca Ortegren, Data Scientist for Clever Real Estate, a platform that connects homeowners with real estate agents.
Overall, Americans have become more reluctant to move, even before the coronavirus pandemic. The U.S. mobility rate—the number of people moving as a percentage of the total population—has fallen since the mid-1980s, according to an MBA report from January that used Census Bureau data. That figure was less than 10% for 2018-2019, down from 20% in 1984-1985, according to the MBA report.
Some of the most common projects being completed right now relate to adding livable space to a house, such as finishing a basement or building a small addition, said Justin Goldman, co-founder and CEO of RenoFi, which is working with half a dozen credit unions. Others are adding pools or updating their backyards, though those are still frequently done in conjunction with other remodeling, he added.
Goldman noted that demand for renovation loans “fell off a cliff” and dropped by 50% at the beginning of the pandemic, since homeowners were waiting to see the extent of the related economic fallout. But interest has picked up. The fintech has completed more than 100 loans with all of its lenders and has received loan requests for $100 million over the last 90 days, he added.
“If you feel good about your financial position and are now working from home, you may need to make a home office,” said Goldman. “Or maybe because of a financial situation, some families are combining multiple generations under one roof and they need to make some changes.”
“What consumers are looking for in homes seems to be shifting,” said Ortegren.
Clever Real Estate compared what those who bought homes in 2020 looked for with what prospective buyers said they wanted in late 2019. The firm found that 2020 buyers put more emphasis on items like a dedicated office, swimming pools and having more space.
“Although that survey examined home purchases, the same is likely to hold true for those looking to remodel an existing space,” said Ortegren.
There are some risks with loans meant for home renovations. Wells Fargo and JP Morgan Chase said in April that they would temporarily stop accepting applications for home equity lines of credit given the uncertainty around the economy. Lenders could decide to limit utilization of HELOCs because they are worried consumers will use the funds to replace lost wages, Tuck said.
“This is concerning because if a customer has to borrow money to live, how will the customer pay that money back?” Tuck added. “If they cannot pay the money back, the [lender] may have to look to foreclose their home and sell it to obtain repayment. Lenders don’t like doing that, because it is expensive and uncertain.”
Ardent Credit Union’s home equity product with RenoFi is a bit different from what some other credit unions offer. It uses the home’s after-renovation value — rather than its current one — when making the loan. That’s a practice more common for banks than credit unions, Goldman noted.
That approach can be riskier since the lender is making the loan based on a future value, sources said. That could become a problem if housing prices drop drastically or consumer preferences shift, making certain additions less desirable.
“I think it depends on the credit appetite and underwriting practices of the individual credit union,” said Walsh. “It really depends on the lender’s willingness to extend credit.”
Ardent is confident in its lending process since RenoFi provides post-project home values based on the improvements being completed. And even if the projection is wrong, “we don’t anticipate the homeowner handing us the keys if the final value is short of the anticipated value,” said Werner.
“Money is so cheap right now,” added Werner. “If you kept your job, it is a great time to borrow.”