From “Consumer Lending In Transition: The Impact of Falling Rates,” a Curinos webinar delivered October 17, 2024, featuring Rich Martin, SVP, Retail Lending; Ken Flaherty, senior manager, Retail Lending; and Kinley Hicks, senior associate, Retail Lending.
Interest rates have begun their descent, and the demand for Consumer Lending products could be profound. Softening rates could also create a transition in the market, reducing interchangeability between Home Equity and unsecured. In this webinar, Curinos’ Consumer Lending market experts, armed with proprietary Home Equity and unsecured lending data, discussed the state of the market, while guiding attendees on what to expect in the months ahead. Here’s are some of the principal takeaways from the session.
1. Mixed economic trends should give lenders a cautiously optimistic outlook for the journey ahead.
Environment factors generally favor the consumer lending climate for the foreseeable future. Unemployment remains at near-record lows, home prices have plateaued, albeit still at heightened levels after a profound price surge, which could make homebuying more affordable and the Fed’s Rate Dot Plot indicates a continuation of declining market rates. Meantime, the pandemic-induced swelling of household savings has all but deflated in an environment of persisting inflation, which could bolster consumer borrowing. But a counterweight to these positive prospects is depressed consumer confidence, which could indicate that many potential borrowers may be hesitant in the coming months.
Environmental Economic Factors
Unemployment
Home Price Index
Federal Rate Dot Plot
Cons Confidence Index
HH Savings Rate
Cons Price Index (CPI)
Source: FRED Economic Data, OECD, Federal Reserve
2. Cycle times for real-estate secured products continue to hover above 40 days, while unsecured is delivered within hours to days.
Many prospective borrowers want their money now, but for real estate–secured products still take more than 40 days to cycle – and that’s a considerable improvement from five years ago. The lag creates an opportunity for unsecured lending options, which typically cycle in about five days, even as their rates and fees are more expensive. This reveals that for many consumers, the price of borrowing is inelastic. They’re willing to pay more in the future for money they need today, not six weeks from now.
Cycle Time by Lending Product
Source: LendersBenchmark HE Originations
3. The difference between Home Equity and unsecured product characteristics are stark, but customers may not always be offered the right solution.
Personal loans and credit card debt continue to rise, even though their interest rates are far higher than home equity products and even though homeowners added $1.3 trillion in tappable equity in 2023 – with fully 30 million of the nation’s households displaying at least $100k. This raises the question of whether borrowers are always aware of or are receiving the best advice when it comes to the right option for them. Relatively green bankers may be leaving money on the table or even contributing to customer attrition by not being fully informed themselves of the most appropriate options and thereby making suboptimal recommendations.
Avg Booked Loan Size
Avg Booked Rate
Avg Booked Credit Score
Source: LendersBenchmark HE Originations, Unsecured Originations; CoreLogic
4. Two-thirds of all first-mortgage homeowners hold rates below 4.5%, so the opportunity for Consumer lending is ripe.
With refi-cashout rates hovering at about 6.75%, the better option than refinancing for homeowners who may be seeking $100k from their equity is currently a Home Equity loan or line. Indeed, refi-cashout rates would need to fall by nearly 2.5%, to 4.375%, to be more competitive. Yes, rates are trending downward, but that would be a significant drop and could take some time. At that level of borrowing, rate conditions in the near term clearly favor Consumer lending to refinancing a first mortgage.
First Mortgage Rate Distribution
Borrowing Option Comparison
Source: LendersBenchmark FM Originations
5. Even though the opportunity for Consumer lending may be ripe, unsecured products have been displaying elevated risk in recent years, unlike real estate–secured products.
With increased reward comes increased risk. The volume of Consumer lending, with is higher rates and higher fees, may be trending upward, but so are its delinquencies. This is in contrast to those of real estate-secured products, which have been holding steady or going down. Much of that trend, not surprisingly, reflects an increasing skew toward higher credit scores. At the same time, creditworthiness for unsecured loans has been deteriorating slightly. Banks are holding the line on underwriting, which has altered the product mix over the past five years and has resulted in elevated delinquencies.
Delinquency Trends (>30 days, dollar-weighted)
Source: LendersBenchmark HE Originations, Unsecured Originations, St Louis Fred
