BLOG VIEW: As the mortgage market contracts in the face of inflation and high interest rates, lenders are increasingly competing for a smaller number of customers. However, historically high levels of tappable equity provide many opportunities for lenders – HELOC originations, for instance, reached the highest level since 2007 last year. This growth will likely accelerate in 2023, as homeowners increasingly use their lendable equity to consolidate unsecured debt and avoid riskier forms of borrowing.
Lenders have an opportunity to educate homeowners about tappable equity to increase customers’ awareness of their financial options. The trend of leveraging preapprovals and prequalification to market home equity loans and HELOCs will continue to pick up momentum. It’s also essential for lenders to focus on the borrower experience, and one way to do so is by partnering with fintechs that can help them provide the accessible, fast, and frictionless engagement homeowners are demanding.
A smaller mortgage market means lenders have to be capable of diversifying their product offerings, providing streamlined experiences and services, and differentiating themselves from competitors. This will require a willingness to test new products and marketing strategies, a renewed emphasis on exceptional borrower experiences, and the ability to adapt as interest rates remain high and purchase and refinance originations fall.
Why Homeowners are So Interested in HELOCs
Homeowners have built up a huge amount of home equity in recent years, and they’re increasingly using it to pay for necessities as inflation and other forms of economic turbulence have created household budget shortfalls. While refinance originations continue to collapse, HELOCs have spiked – lenders authorized over 405,000 HELOCs in the third quarter of 2022, up 41 percent from a year prior.
While tappable home equity is expected to slightly decline this year as home values fall, homeowners will continue using HELOCs rather than relying on less secure forms of credit. According to data from the Federal Reserve Bank of New York, credit card debt reached $986 billion last year – more than the pre-pandemic high of $927 billion. The average credit card interest rate is over 20 percent, which is much higher than the rate for HELOCs. Meanwhile, hardship withdrawals from 401(k) plans reached an all-time high last year – an alarming indicator that there aren’t sufficient sources of liquidity for struggling Americans.
Although the personal savings rate has recovered since hitting its lowest point in over a decade and a half last year, it remains much lower than it was before the pandemic. This is another reminder that HELOCs will remain a valuable financial cushion as the economic situation becomes increasingly bleak.
Communicating With Homeowners About Their Options
It has never been more important for lenders to provide homeowners with information about the full range of available financial options. This won’t just help lenders diversify when doing so is essential to sustain their business – it will also benefit homeowners by giving them much-needed liquidity in the middle of an economic downturn. Despite the slump in the real estate market, homeowners are still sitting on a whole lot of home equity – funds many would put to use if they had a better understanding of how they could do so.
Even as the federal funds rate has surged, Competiscan reports that the volume of home equity mail remains relatively stable. But email volume has exploded by 214 percent year-over-year and 158 percent from Q4 2022 to Q1 2023. From the beginning of 2022 to 2023, the proportion of total mail volume dedicated to home equity jumped from 18 percent to 38 percent. Credit unions and other institutions clearly recognize that homeowners are still looking for low-rate lending options to get them through this period of high inflation and interest rates – a need which is all the more urgent as refinance volumes fall.
The availability of HELOCs and other financing options doesn’t matter if homeowners aren’t aware of these options. At a time when homeowners and lenders can both benefit from the use of tappable equity, education is a critical priority for credit unions.
How Lenders Can Remain Competitive During a Slowdown
While homeowners still have access to ample home equity and lenders can help them leverage it, this doesn’t change the fact that credit unions face a difficult 2023 and 2024. It’s difficult to anticipate how significant the market correction will be this year, and the entire banking sector is under tremendous pressure as interest rates reach the highest point since 2007. This is why the need for competitive differentiation among lenders has never been greater.
This begins with a willingness to shift the lending business model toward in-demand products and services – particularly as other segments suffer. As purchase mortgage volume and refi rates tumble, HELOCs are rapidly gaining popularity. Lenders also have to make sure the process of applying for and managing HELOCs, communicating with the institution, and receiving other services is smooth and accessible. The need for better borrower experiences (which will attract and retain customers) has led banks and credit unions to build relationships with fintechs in recent years. The proportion of institutions that say fintech partnerships are important jumped from less than half in 2019 to 89 percent in 2021.
Lenders have to figure out how to remain competitive in a smaller mortgage market, which means diversifying their products, partnering with fintechs, and making excellent user experiences a core priority. By shifting their focus to home equity and building proactive relationships with borrowers to understand financial needs, lenders position themselves well to deliver strong results.
Jill Skinner is CMO at Coviance.