Deposit Behavior Can Predict HELOC Utilization

The home equity market is roaring back to life, with more growth expected through this year and beyond. Cash-out refi is shifting back to home equity as mortgage rates rise and customers seek to preserve low first-mortgage rates. At the same time, high home prices have created new equity to tap, both for current and new home equity borrowers.

Indeed, home equity already makes up more than half of new applications this year and originations are up 40% from 2021. (See Figure 1.)

This all seems like good news for lenders, but there are headwinds. Curinos believes that lenders who hold the HELOC applicant’s deposits will be well-positioned to navigate these challenges because they can better assess the customer’s financial well-being and credit need.

Figure 1: Cash-Out Refi and Home Equity Application Mix

Source: 2022 Curinos Benchmarks and Analysis

THE CHALLENGES FACING HOME EQUITY

Despite its growing popularity, home equity has challenges. For one thing, it can be a tougher sell than unsecured loans because the average closing time is a prohibitive 45-60 days.

That means lenders must figure out how to position the product’s value (i.e., better interest rates) against the customer’s need for money now.

Furthermore, the frontline salesforce has historically targeted super-prime credit customers (credit scores above 740) with large home equity lines of credit, even though many customers don’t even need the product. This is partially due to misaligned sales incentives that are tied to unit production rather than utilization.

As a result, super-prime customers make up the bulk of existing portfolios, but they only use half as much of their lines as prime credit customers (scores between 680-739). This means a super-prime customer has one-fifth the annual value of a prime customer, driven by low utilization and large unused lines that cost lenders millions in capital charges each year. (See Figure 2.) Meanwhile, customers in near-prime and sub-prime have been historically underpenetrated even though they have the greatest credit need and represent potential profit for lenders.

Lenders are starting to realize this opportunity. Curinos benchmark data show originations are increasing in the less-frequented segments of the credit buy box, with weighted average CLTVs and FICO scores shifting modestly year-over-year. While this shift to a more balanced credit buy box is likely to impact lender’s stellar performance on delinquency rates (the industry has hovered under 100 basis points in active delinquencies over the last 24 months), it will also result in materially higher utilized balances.

Against this context, Curinos sees three tactical opportunities for lenders:

  1. Improve Line Management — Target marketing and sales investments to traditional HELOC customers who will actually use the product, improving gross margins while decreasing unused capital charges
  2. Expand Buy Box — Increase penetration outside super-prime credit, driving utilization while simultaneously improving financial well-being and CRA compliance
  3. Innovate Product and Process — Improve both product and process to better meet customer credit needs

Figure 2: HELOC Penetration and Utilization

Source: 2022 Curinos Benchmarks and Analysis

VALUE OF ON-US DEPOSITS 

Home equity providers with deposit relationships have a head start to capture these opportunities. On-us deposit behaviors are a key source of proprietary data that have been historically underutilized in credit. Lenders who hold deposits have expansive views on an applicant’s financial well-being and credit need. This data is FCRA-compliant and already sits within the lender’s firewall. This on-us data is also more reliable than self-permissioned data, presenting a unique information advantage for deposit-holding lenders compared with fintechs or other non-primary providers that don’t have the deposit relationship.

Research from Curinos’ Deposit-Enhanced Credit (DEC) and client experience show that advanced deposit behaviors are highly predictive of HELOC usage. The behavioral drivers that explain changes in balance movements provide insight into both product need and risk. As one example, understanding how much discretionary savings a customer has relative to daily cash flow provides a strong indicator of how likely the borrower is to use the product. By using only deposit data that is available prior to HELOC application, lenders can discriminate which customers will activate their line (KS = 23) and how much they will utilize (R2 = 99%). (See Figure 3.)

Leveraging these analytics, lenders can target customers most likely to use a HELOC, while avoiding or reducing line sizes for those that have been sold a “rainy day” fund without ever intending to activate it. Lenders can also tailor line sizes to actual expected usage, further reducing unused capital costs.

These same advanced deposit behaviors are also highly predictive of credit risk. This enables lenders to expand their buy box by identifying on-us customers with lower risk than indicated by traditional credit scores. This simultaneously deepens the customer relationship (“we can say yes because you bank with us”) and further improves utilization by providing credit to those who need it most. On-us deposit insights are a great way to drive financial well-being and CRA compliance while profitability growing utilization.

Ultimately, on-us deposit insights provide tactical new analytics that enable lenders to prioritize marketing and sales resources in the traditional super-prime/prime buy box toward audiences that will be more likely to use it (while avoiding those who won’t). These insights also help lenders to selectively expand the buy box in near-prime by identifying customers with relatively limited risk, but high potential for utilization. (See Figure 4.) This ultimately translates to significantly more utilization with large reductions in unused capital charges.

Figure 3: DEC Activation and Utilization

Source: Disguised Curinos HELOC client data; Curinos analysis
Activation defined as any draw within first 2 years on book.

DEPOSIT INSIGHTS ALSO SUPPORT PRODUCT INNOVATION

In addition to better analytics, HELOC is ripe for product and process innovation to meet customers’ needs. As already noted, long cycle times (from application to disbursement of the funds) are among the biggest challenges facing prospective borrowers when considering home equity versus other forms of credit (e.g., unsecured). Owning the deposit account can help here too.

For example, home renovation remains one of the most common uses for HELOC. Borrowers often need an initial down payment for their contractor, who likely can’t wait 45-60 days for a HELOC to close. Lenders are already starting to reduce cycle times by improving appraisal process and better managing the customer journey. They should also consider hybrid products to specifically address customer needs. A small, unsecured loan can be quickly underwritten to pay a contractor’s deposit. This unsecured loan can then be converted once the HELOC is approved. The initial unsecured loan can be underwritten even faster by using deposit insights to assess credit risk, quickly approving the loan using only data already within the lender’s firewall.

Lenders can also train frontline staff to better understand the product and improve their ability to match it to customer needs. Training can improve these customer-facing conversations to focus on the purpose of the credit need and determine whether a loan or a line is a better fit.

There is little doubt that lenders can capitalize on home equity’s resurgence. But they need to better understand their customers to target the right prospects based on expected activation, utilization and risk. Fortunately, deposit-holding lenders have huge amount of proprietary data about their customers to enable better decisions. On-us deposits are highly predictive of HELOC usage, before someone applies for the line. The right combination of analytics, benchmarking and innovation will ensure success in 2022 and beyond.

Figure 4: Deposit-Enhanced Credit Risk: Bad Rates within Prime Traditional Score Bands

Source: Disguised client HELOC/ULOC and deposit data, Curinos Analyses
Bad definition: ever 90 days past due next 24 months; Good: never more than 5 days past due next 24 months
Zachary Kaplan
Director
zachary.kaplan@curinos.com
Ken Flaherty
Sr. Consumer Lending Analyst
kenneth.flaherty@curinos.com
Shelly Photiades
Principal
shelly.photiades@curinos.com
Rutger van Faassen
Head of Strategy
rutger.vanfaassen@curinos.com
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