From the Curinos webinar, “2024 Outlook: Three Things Home Equity Lenders Should Know Now” on December 13, 2023. The webinar featured Richard Martin, director, home lending; Ken Flaherty, manager, home equity; and Kinley Hicks, market analyst, home equity.
1. As customer preferences shift toward digital channels, lenders are becoming less dependent on branches to drive origination volume.
Having reliable digital capabilities is one of the most effective ways a banking institution can both acquire and retain customers. This has been the case for years in deposit gathering and credit card originations, and now more than half of home equity bookings come through centralized, non-branch channels (including call centers). Curinos believes the trend will continue to the point that three-quarters of all originations will come through channels other than the branch. But getting there means a sustained emphasis on education about home equity products as well as the user experience.
2. The early trend for active delinquencies in home equity originated in 2023 is outpacing older vintages.
With the exception of a recent uptick in credit card and auto, overall delinquencies are in a normal, manageable range. But active delinquencies for home equity lines of credit (HELOC) originated in 2023 are markedly higher than older vintages at the nine-month mark and is worth monitoring. One possible reason: Interest-only payments today are three times greater – at more than 9% interest – than at the same time for loans originated in 2018. With Fed Funds rate cuts looking likely in 2024, many holders of high-interest HE loans may seek payment relief by pivoting to another debt product.
Home Equity Delinquency Trends By Vintage - Balances
3. Second-lien HE loan origination may weaken in a falling-rate environment.
Second–lien, home-equity loan production has been providing much needed ballast to lender portfolios, but a softening of interest rates could begin to create drag on originations, especially within the next 12 to 18 months. On the other hand, many of these borrowers – and prospective borrowers as well – may have been spooked by the quick and sizable run-up in market rates over the past two years. They may not want to risk being caught in a variable-rate HELOC should recent history repeat itself. This has kept some lenders bullish on home equity loans.
Active 2nd Lien HELoan Unit Distribution By Contract Rate Range
4. Industry focus may be too much on origination growth and not enough on balance growth.
Balances continue to drop in stair-step fashion from one year to the next, adding up to a 58% decline in 10 years. That raises the question of whether the industry is too focused on originating home equity lines and not enough on encouraging borrowers already in the portfolio to use their lines more actively. As growing credit card balances indicate, customers aren’t adverse to taking on more debt, so the opportunities are there and lenders should be able to have it both ways. It will just take the required resolve, a shift in strategy and a fair amount of elbow grease in the new year.
YoY HELOC Market Balance And Utilization Trends
5. Curinos forecast: Challenges will continue in 2024, but conditions will begin to abate later in the year.
Since its inception, outlooks in Curinos’ National Home Equity Forecast Model have aligned closely with actual market performance. For 2024, it tells a tale of two distinct halves. The first is forecasted to experience 10-20% volume declines, consistent with anemic loan application flow in recent weeks. In the second half, the model forecasts a 15% improvement Y/Y, but the rebound may still leave 2024 with even less total volume than in 2023.