Getting Ready for a Comeback in Home Equity

Home-equity loans have taken a back seat in the mortgage industry in the last several years. Some big lenders stopped offering the product as low rates drove customers to refinancings and cash-out mortgages. And even fintechs were focused on other financial products.

That may be all about to change.

Higher rates will likely drive homeowners back to home-equity products for their cash needs and away from the refinancings that have been dominating the industry.

But is your bank ready to meet the coming demand for more home-equity loans? Curinos believes this is the time to start preparing new home-equity strategies for the branch, digital channel and back office.

HOME EQUITY POISED TO GROW

Mortgage volumes set records in 2020-21, mostly fueled by refinance activity as homeowners raced to take advantage of historic low rates. The refinance volume is poised to retreat in 2022 as rates rise; economists at Fannie Mae project rates will increase roughly 15% next year as the Fed takes action to tamp inflation.

Meanwhile, the total home-equity market has been contracting. Home equity, including HELOCs and loans, represented about 12% ($58 billion) of the retail mortgage market in 2020-21, down from 39% ($85 billion) in 2018. (See Figure 1.)

Figure 1: Home Equity vs. Retail Mortgage Market Volume by Product Type

Source: Curinos' Consortium Data

The run-up in housing prices means that homeowners are sitting on a mound of equity in their homes.

The prolonged period of extremely low rates means that most homeowners have already taken advantage of positive market conditions for mortgage cash-out vehicles as they sought to make capital improvements at home during the pandemic. As a result, lenders will be looking to subsidize a large portion of their expected drop in mortgage refinance volume and revenue with home-equity balances.

Furthermore, the run-up in housing prices means that homeowners are sitting on a mound of equity in their homes. About 40% of U.S. homes with mortgages were equity-rich (equity of at least 50%) in the third quarter, up from 28.3% in the year-earlier period, according to ATTOM. Fannie Mae, meanwhile, projects housing prices to grow by as much as another 16.6% next year.

Webinar Wrap-Up

More than 70 attendees recently participated in a Curinos webinar hosted by the CBA called “Lending Inflection Point: Are Lenders Poised for a Resurgence of the Home Equity Market?”

As part of the webinar, Curinos polled the attendees on issues related to home equity. Here are the results:

What will be the tipping point for mortgage cash-out volume to shift to home equity?

Mortgage rates to significantly increase
29%
Mortgage rates to moderately increase
48%
Mortgage originations favor purchase volume over refinance
10%
Home Equity originations will make a comeback in 2022 regardless of market factors
12%

How much do you think the home equity market will grow in 2022?

Negative market growth (< 0.00%)
4%
Flat market (= 0.00%)
11%
1.00% to 10.00%
49%
10.01% to 25.00%
30%
25.00%+
7%

Which takes longer as of October 2021?

Application-to-Funding for 1st Mortgage Cash-out Refinance
63%
Application-to-Funding for Home Equity
38%

PREPARING FOR HOME EQUITY

Curinos has identified three areas that bankers need to address as they prepare for the next home-equity cycle.

1

THE BRANCH

Chances are that your branches haven’t sold a home-equity loan in a long time. And given the high levels of turnover, it is quite likely that some of your branch bankers haven’t ever talked to a customer about a home-equity loan.

What to do: Training will be critical when customers start asking about home-equity loans. Because consumers typically buy home-equity products from the bank that holds their primary checking account, it will be important for the banker to discuss the customer’s holistic financial position, including savings, borrowing and investing. That includes conversations about the logic of using home equity to pay for large purchases or home improvements rather than tapping savings or liquidating investments.

2

DIGITAL CHANNELS

The pandemic has accelerated the transition to digital channels and customers are more comfortable making important decisions online. That also means they are skilled at shopping around. Home equity historically has been an inelastic product, but that may change this time around especially if fintech providers woo consumers with snazzy features and tools that traditional lenders haven’t created.

What to do: Lenders that want to pump up home-equity volumes should expect to run regular marketing promotions, including short-term rate offers and cash bonus offers to help attract new and existing business. This is an area where fintech providers typically excel, so traditional banks will need to be nimble. The home-equity product hasn’t changed much over the years and is still typically a 10-year draw on a 30-year note. This may be the time to test new products on the digital audience.

3

PROCESSING CAPABILITY

The average size of a mortgage cash-out loan today just over $300,000 while the average home-equity loan is a mere $136,000. That means banks that want to make up lost mortgage volume with home equity will have to boost their capacity to process those applications.

What to do: Banks should allocate money in the 2022 budget to prepare for a surge in applications. This means investing in better processing technology, developing new models (especially for providers who have been out of the home-equity business for a while) and considering pipeline management, costs to originate and operational risk that could also affect the bank’s reputation.

It may be several months before the consumer appetite for home-equity products becomes apparent. Demand for home improvements (a typical reason why consumers tap home-equity products) remains high, but some of the actual work is being hampered by supply-chain shortages. Consumer balance sheets are in good shape: Americans are taking on new debt (home equity loans are often used for debt consolidation), but the personal savings rate is also high.

Despite this uncertainty, the shift toward more home equity is likely coming soon.

Ken Flaherty
Sr. Consumer Lending Analyst
kenneth.flaherty@curinos.com
Brandonn Dukes
Head of Consumer Lending
brandonn.dukes@curinos.com
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