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Home-Lending Update: How To Strive Till ’25

Residential real estate lenders across the country are all too happy to put 2023 behind them while also hoping to retire the “Survive till ’25” mantra as they look forward to healthier top- and bottom-line growth this year.

To get through 2024 and on to a more favorable climate, here’s what we’re thinking:

  • Even with a more dovish Fed, expect higher rates and compressed net interest margins to continue.
  • Higher mortgage volumes may not be the best route to higher profitability.
  • For HELOCs, the smart play may be to shrink the lines and focus on growing the balances.

Mortgage and home equity originations share the continued challenges of higher rates and lower consumer confidence, both of which correlate highly to the demand for home lending. Persistently high interest rates have depressed purchase and refinance volumes, and although The Conference Board’s consumer confidence index has improved in recent months, it’s still lower than it was in 2021 and before the pandemic, the result of high inflation, dwindling household savings and, of course, interest rates.

Add to that list a bleak consumer outlook on access to credit. In January, the Federal Reserve Bank of New York’s Survey of Consumer Expectations found that half of potential borrowers feel that obtaining credit now is harder than in the past — that’s up more than double from 2019. So even as the Fed signals that lower rates are coming, the mood and rate environment is likely to inhibit purchases throughout 2024.

Setting The Stage For 2024

Figure 1: Volume Growth, Jan. ‘24 vs. Dec. ‘23

The prospect of softening rates in 2024 prompted a one-month spike in demand for purchase and cash-out home borrowing.

The Fed’s signaling of lower rates in 2024 pushed the 10-year Treasury to below 4% at the end of the year, and the rate improvement carried through much of January. Borrowers had been waiting eagerly for this, and the pent-up demand created a surge in mortgage lending. Rate-lock volume was up 35% from December, while purchase transactions and cash-out refinances rose by 42% and 33%, respectively (Figure 1). Still, it’s unclear whether January’s spike is sustainable.

Home equity (HE) originations, on the other hand, continued downward. After a dramatic year-over-year decline of almost 30% in 2023, they’ve recovered somewhat but are still about 20% lower from this time last year. This aligns with Curinos’ National Home Equity Forecast, which projects that originations in the first half of 2024 will decelerate by 15% to 25% (Figure 2).

Figure 2: Home Equity Booking Growth Trends (Comparable Periods)

Home equity originations, like those of mortgage, face the joint challenges of higher rates and lower consumer confidence, both of which correlate highly to demand.
LendersBenchmark Analyzer
Source: LendersBenchmark Analyzer HE Originations

Chasing More Volume May Not Be The Answer

Even if and when lower rates begin to take hold, margin and fee compression will continue, and many mortgage lenders may respond by driving higher origination volumes as an offset.

But chasing more volume, largely through price, is a high-stakes gamble that can spur a race to the bottom that only those with enough scale and the right cost structures can sustain. This includes lenders that remain in a strong cash position and have the ability to sell mortgage servicing rights to shore up capital as needed. Even for some of them, however, that may not be enough — they may also need to further reduce personnel costs, reconsider production channels or even explore M&A as an option.

For home equity lenders, the way forward is even murkier. Curinos forecasts that HE 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 years (Figure 3).

Figure 3: Home Equity Balance Trends, Month-Over-Month

Average HELOC balances have been sliding for years, and the borrower mindset hasn’t shifted back to higher line usage.
LendersBenchmark Analyzer
Source: LendersBenchmark Analyzer HE Portfolio

In addition, the impending Basel III requirements for capital-expense charges 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. This may seem like a departure from traditional HE lending, but newer market entrants such as fintechs and independent mortgage brokers are pursuing it. They’ve quickly made significant inroads by offering products that require fully funded HELOCs at closing while at the same time charging for the origination.

The vast majority of traditional lenders, on the other hand, do not pass origination costs on to the borrower, according to a recent survey of Curinos’ consortium of home equity lenders. But this fee-free approach inherently attracts borrowers who plan to use HELOCs as rainy-day accounts rather than as vehicles for purposeful, balance-driven debt. It may be time for some lenders to “do more with less” by saying goodbye to large unused lines and driving profitability through balance-focused products.

Credit card debt increased $50 billion in the fourth quarter, with total outstanding balances ballooning to $1.13 trillion, according to recent consumer data published by the New York Fed. At the same time, household savings rates dipped to their lowest levels in more than two decades. So even though borrowers don’t appear to be averse to debt, they’re more sensitive to the costs they bear and the balances they keep. That makes it more important than ever for lenders to offer them a suite of products with features that educate them about the right vehicle for them to fund large purchases and refinance existing debt.

As these challenging times persist, getting back to basics is perhaps more important than ever: understanding borrower behaviors and delivering products that identify with their needs, while aligning with the institution’s financial hurdles. This could include doing more with less. Lenders may want to consider driving profitability through a more simplified mortgage suite and by aligning HELOC product features that cater more to a borrower’s need for debt consolidation and payment relief.

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