From “HELOC Balance Growth Can Be Achieved! Is Your Growth Strategy Working?”, a Curinos webinar featuring Rich Martin, director, Real Estate Lending Solutions; Ken Flaherty, manager, Home Equity; and Kinley Hicks, market analyst, Home Equity.
Findings from Curinos’ proprietary National Home Equity Forecast indicate that home equity originations will likely improve in the second half of the year, but the borrower’s mindset still hasn’t shifted: Average HELOC balances have been sliding for more than a decade. At the same time, the impending Basel III requirements will make unused HELOC lines more expensive for lenders to hold, which could compel some to cut back excess line sizes and focus more on balance growth.
Here’s how Curinos home-lending experts see the current state of the market:
1. HELOC Balance Utilization Continues Downward
Average credit card interest rates stand at more than 21% and cumulative interest expense on non-mortgage debt is approaching that of mortgages. HELOCs would seem to be the ideal way to reduce interest expense, but HELOC balance utilization continues to slide even though balance commitments have grown slightly in recent years. That borrowers are using HELOCs less frequently than they have in the past leave us scratching our heads.
HELOC Consortium Active Balance Trends
2. Emphasis On Super-Prime Could Be Inhibiting Overall Line Usage
The good news is that HELOC credit quality is strong and getting stronger. Delinquencies measured in both units and dollars are about half of what they were 10 years ago. The bad news is that there’s an inverse relationship between credit quality and line usage and more commitments are being made to super-prime borrowers. In the past decade, the highest credit decile represented about 35% of total originations. Today it’s fully half. The more HELOC originations skew toward the highly creditworthy and away from the lower deciles, the less likely overall balances will grow.
HELOC Origination Score Distribution Trends (Units)
3. Line Usage At All Credit Deciles Continues To Slump
Putting more highly creditworthy borrowers on the books may mean lower overall balances, but the trend in sagging line usage shows up in all credit deciles, so it appears the adage “just originate and the dollars will come” is no longer working. One issue could be borrower education. Many potential borrowers simply may not understand how the home equity product works, so even if they select a HELOC, they may be slow to open it or may not open it at all.
HELOC Usage Rates by Credit Decile
4. HELOCs May Not Be Convenient Enough
Applying for a credit card is easy and even an auto loan doesn’t usually require a visit to the branch. HELOCs tend to be more complicated, so a higher level of service may be required, or preferred, or both (age may also play a role, as branch visits and HELOC usage both tend to skew older). This dynamic comes at a time when convenience drivers favor mobile over physical. According to the latest Curinos US Shopper Survey, over the past four years, branch-centric drivers of convenience declined from 31% to 24% while online/mobile factors jumped from 27% to 43%.
Drivers Of Convenience – Trended
5. Growing Balances Will Require Data-Fueled Strategies
A winning home equity strategy starts with sizing the opportunity, and that takes the data and analytics to assess the competitive terrain and borrower behavior, the latter including delinquencies, utilization and average balance levels. Deposit-enhanced credit is an effective way to size up a borrower’s creditworthiness and propensity to utilize their line. A key component of any strategy is striking the right balance between risk and reward – opening the credit box can increase volume, but only at the right price points.
Pillars to Building a Home Equity Strategy Focused on Balance Growth
