Join us as Senior Market Analyst Ken Flaherty discusses the resurgence of the long-slumbering home equity market, including how to capitalize on the sudden boom and pitch the product to borrowers who aren’t familiar with it.
Rate and subscribe! | Learn more at curinos.com | Questions or feedback? Email us at finsights@curinos.com
Join us as Senior Market Analyst Ken Flaherty discusses the resurgence of the long-slumbering home equity market, including how to capitalize on the sudden boom and pitch the product to borrowers who aren’t familiar with it.
Rate and subscribe! | Learn more at curinos.com | Questions or feedback? Email us at finsights@curinos.com
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Rutger Van Faassen: Hello, and welcome to Curinos (F)insights. The podcast that explores some of the most pressing topics for financial services. Insights that help you navigate today and anticipate tomorrow. Hello and welcome to the Curinos (F)insights podcast. Today, my guest is Ken Flaherty, who is Senior Market Analyst here at Curinos. Welcome, Ken to the podcast. Before we dive into talking about home equity. Can you tell us a little bit about what your role at Curinos entails?
Ken Flaherty: Yes, of course. Thanks for having me on, Rutger. I support our real estate consumer lending division, focusing primarily on the home equity market. As a quick detail on that, I was a longtime client of Curinos prior to joining the organization. I've been able to leverage my industry experience and my data expertise, really working alongside our clients to really help understand the market insight and how they're performing to their peers.
Rutger: Glad to have you here. We're going to talk a little bit about the lending landscape and as rates rise, recently, the fed increased the fed funds rates again, with that backdrop and of the mortgage landscape right now, how is home equity fitting in?
Ken: It's fitting in great. I say that because I feel like we've been talking about this for the last several months. We feel like the writing has been on the wall. For-- '22 feels like the right year for home equity to make a resurgence. It's great because we're starting to see that come to fruition of that natural gravitation of homeowners now opting for a home equity product. It feels right because customers are making the right choice of what we feel as if you're going to tap into the equity in your home--
Equity is a fantastic product and it has been for years, but it's not only that it's making the right choice of what's the correct finance vehicle. We think about the millions and millions of homeowners that took advantage of the recent rate environment, are locked into a 2% or 3% mortgage. Rates are certainly aren't there now. They're preserving that first and now looking towards those alternative products like a home equity product to meet their cash-out needs.
Rutger: Yes. Curinos has been saying for months that home equity was likely to make a comeback as rates are rising. What have you seen yet to date? What are the numbers?
Ken: Believe it or not, it's really not that hard to make up for some lost volume from prior months and prior years, just because home equity has really taken a backseat given the mortgage rate environment over the last two years. For Q1 of '22, both volume and unit counts, volume is up over 40% and that's a huge, huge number. We're now seeing home equity default to almost 80% of cash-out transactions are home equity products. Now the mortgage is the product that's taking that backseat. As I mentioned before, of more of that natural gravitation of this just makes sense for me as a homeowner to not touch a first mortgage or not redo that process of mortgage cash out and take more of a junior lean position and tap into a home equity product. Seeing some really big numbers. Again, that's just for Q1, we're really excited to see what happens in the data of the next couple of months.
Rutger: Right. Up 40% applications that is pretty significant. That really shows the trends that we've been talking about for a while now because home equity hasn't been very popular for a long time. A lot more cash-out refi was being done. There's a whole generation of bankers and homeowners who probably don't know much about it. How's that factoring into the scene today.
Ken: This is one that's near and dear to my heart. I got my start in banking, starting in a branch and worked for a couple of different branches. I think this is very challenging for bankers because if you think about the natural attrition in branches, there's just a ton of turnover in the branches. You think about-- bankers haven't seen a rising rate environment, let alone focused on a home equity product in a number of years. Selling a variable rate product such as a HELOC, I think, is going to continue to prove to be challenging for banks and financial institutions of getting that banker conversation succinct enough, where they're identifying the need of the customer instead of just selling rate, which has really been the go-to strategy over the last two years.
Rutger: We also see that demographics are almost non-overlapping. People in branches are usually young and don't own a home and the people that are getting into home equity lending are usually further on in their life cycle. That might be a problem as well. Do you see that as one of the problems?
Ken: Yes, absolutely. It's that client that would generally use the branch versus that growing segment that is getting into the first-time home buying. It feels like a really big disconnect on who's actually leveraging the branches or that sales force that's identifying that need for that customer. To answer your other question, though, as far as the generation of homeowners of-- that may not have ever used the home equity, we're not sure if we've seen the true impact of that yet. Given the vast majority of homeowners are still in that older age demographic, but I think that's a really big challenge and real something that lenders really should start to focus on is that as that shift of is home equity top of mind, like it was for the previous generations of, "Hey, if you need a large purchase or you need a finance, don't go for the quickest and easiest. Sometimes that home equity product is the best solution for you."
I do think that we have seen a bit of that shift because you can get an unsecured loan or buy now pay later in such a short amount of time, appealing to some of the younger age demographics. That may not be the best long-term solution, but it's the easiest. I do feel there's a bit of a disconnect there and might be more of an educational challenge of lenders to bring homeowners up to speed on what's the best finance vehicles for them based upon their needs.
Rutger: Ken, a number of lenders stopped selling home equity products when rates were low during the early stages of the pandemic, have any of them returned to the market?
Ken: That's a great question. I would actually break up that question in the two segments of a population of lenders that stopped selling home equity and a population, which is actually the bigger population of lenders that drastically reduced their credit box. What I mean by credit boxes, the group of high-risk or low-risk credit cells that they're willing to lend to such as high FICO, low FICO, high loan-to-value customers versus low loan-to-value customers.
That contracted pretty considerably for a number of lenders to really focus on the more premium set of credit quality customers. That was the alternative for many lenders of let's not get out of that business altogether. Let's just shrink our credit box so we're really just focusing on the super-prime, low-risk customers. With those definitions starting back on your first one, we have not seen many lenders that exited the business completely come back.
That's I think a bit surprising to me as far as the segment of lenders that closed off their credit box and group of customers are willing to lend to, we have seen that open back up even further to the extent of where we were in early 2020. What I mean by that is around 2019-2020, the credit box for most lenders was pretty average, not a lot of lenders going high loan-to-value or super low FICO credit box.
We're actually seeing a larger credit box right now versus where we were even pre-pandemic. I wouldn't say to the point of it's going to make me nervous or lose sleep at night, but it does tell me the bit of aggressiveness that more lenders are willing to take. Certainly, the appetite that more lenders have given some of the strong credit performance customers have had throughout the last two years in the middle of a pandemic.
Rutger: When you say buy box, buy box is basically the criteria within which a lender is willing to originate loans. What credit scores, what CLTV so combined loan-to-values, what amounts and potentially also sort of what geographies is. Is that correct?
Ken: That's absolutely correct, yes.
Rutger: Now, is today's home equity product the same as in past cycles, and if not, how is it different?
Ken: Unfortunately, the features and benefits haven't changed, but there's still some of the best in the market. There's still a very distinct difference between a home equity line of credit and a home equity loan. For example, the payment flexibility on home equity lines of credit of being able to pay interest only, that is a standard feature and one that most customers, when they think of a HELOC, a Home Equity Line Of Credit, that allows me the ultimate payment flexibility in allowing me to continue to take draws over a number of years. It is a very, very old method, but it continues to work, but I've always encouraged the industry and my peers to think of let's think a bit more broadly to more identify and align that with the current spending patterns in the market.
Rutger: Now, given that we're in a rising rate environment that there is a feature that I know has been around for a long time, but maybe is that coming back in style, which is the fixed-rate option, right? The option to actually lock in some of your balance that is currently variable in a fixed rate, do you think that that fixed-rate option feature is going to come back in this rising rate environment?
Ken: I do. I'm not going to say how much I think it's going to return, but I do think it will return. Virtually every existing and prospect client call that I have on a week-in, week-out basis, everybody's asking and talking about fixed-rate options on home equity lines of credit and it makes sense, right? It serves two purposes. It serves the population that's sitting on a lender's portfolio where a customer gets nervous and they're about to get their next statement and see that the fed just raised prime another 50 basis points. Well, that's going to have a direct impact.
Those customers that are nervous about that rising rate environment, a fixed rate option is a great solution to avoid some of that runoff or attrition of Mr. and Mrs. Customer, "We have a great solution if you're nervous to be able to fix your balance and fix that interest rate for you, and come up with a fully amortizing payment plan for you." That's going to alleve a lot of nervousness with those customers position side of customers that, "Hey, I really want to tap into the equity in my house. I need to build that new shed or whatever the case is but I'm nervous."
This is a great solution to be able to alleviate some of that nervousness on the variability in that product. All that said, everyone's talking about it, we have yet to see lenders do it with any sort of volume, and I think that's mainly because fixed rates or fixed rate options are really for a very, very select scenario, very select group of customers. I think it is more of a proposal on having the option to alleviate customers' concerns, but how many actually execute on it might be a completely different story.
Rutger: No, that makes sense. Is fintech playing a role in home equity today?
Ken: They are. I do feel that digital lenders and fintech lenders are going to create more of a ripple in the industry. It's really because of one point, it's because of how fast those lenders can get the product into the consumer's hands. I think pricing will be secondary, but if these lenders can do it in the speed that they're saying, which is under a week's time, that's going to compete more at the unsecured space, and that's going to bring this home equity more top of mind like we're mentioning before to maybe some of the younger demographics of, "I'm not standing in line for two months to get a home equity line of credit, but if you can get it to me in a week I can be patient for a week."
Rutger: We're also seeing some alternative solutions the company called Points, I think just announce another funding round. They're actually participating in equity that a customer has, it's not necessarily a loan. Do you see that competing with the traditional home equity line of credit?
Ken: To be honest, I'm not sure because that is also a scenario that I think is going to appeal to a market where I'm concerned about payment flexibility. Also, I don't want to wait in line for a conventional HELOC for a couple of weeks or two months or something to that case. This type of product has actually been around for a while. I think given the rising rate environment and just the excessive equity that consumers are sitting on, given the home price appreciation, has created more of a niche market to create a process where it's, "Hey, we'll take a stake in your home. We're just going to give you cash out." There's a lot more potential upside for a company like Point or others that are in this space, but I'm not exactly sold on how much of the market it's going to steal from the current home equity industry as we know it today.
Rutger: Now, you mentioned already when we talked about fintechs, how long the process can take. The traditional home equity process has always been lengthy and it seems more complicated than it needs to be. Do you think that that is changing anytime soon?
Ken: I do, and in fact to make maybe a more of a fair statement to the home equity lenders out there, we have seen dramatic improvements just since the beginning of this year. Believe it or not, the average cycle time, which is the time the application gets entered to the time the loan is booked and funds are given to the customer, it hit a peak of almost 80 days back in January of this year.
I'm a pretty patient person, but that would get me pretty impatient fairly quickly. We've actually seen that come down about 25 days since the beginning of the year. That's a huge, huge improvement, but what's more encouraging to that is more, perhaps a sign of lenders have this under control because of operational efficiency. We're seeing volume go up. As I mentioned earlier, 40% increase can reach havoc on pipelines, but as we're seeing that, we're also seeing turn times and cycle times come down, which is the right scenario, which is exactly what you want to see. You don't want to see the inverse.
I'm confident that the industry will continue to see that, but holding my breath for perhaps that might plateau. Because we might get to a point where that's as low as current processes will allow given the huge growth in home equity but certainly hopeful. We'll get closer to that one-month 30-day number.
Rutger: Do banks track the use of home equity loans for borrowers, and if not, should they?
Ken: Great two-parter question there. I have a little bit of experience here and I think for your first question, the answer is not really, which is lenders really don't track the HELOC usage, which is, I think really challenging for lenders. That's mostly because-- we did a survey actually with the Consumer Bankers Association, which we polled, I think it was close to 25 banks that responded--
I think it was like 90% had a response that, no they don't track. That aligns pretty similar to my background, and banking experience. It's very difficult to track mostly because the go-to product, the go-to solution for you to tap into your existing line of credit is a paper check. It's really difficult to create a digital space, to create data and analytics of where is that customer using that check versus if you originated it or took those funds digitally, transferred them, used a credit card attached to your home equity line of credit, it's very easy to track.
So that two-parter question there, I don't think many lenders are tracking it because of some of those shortfalls in the usage opportunities, but I definitely think that they should. I think as this pendulum shifts, it's a prime opportunity for lenders to understand where are their clients using the HELOC funds to better gear some of the marketing efforts and get in front of them you should use it for this or you can use your home equity line of credit for these types of purposes.
Rutger: What else do you think lenders can do to modernize this product and make it more efficient?
Ken: Well, maybe stay on that same track in the paper checks. That to me is the biggest standout. If you want clients to use it, don't make it hard to use it, make it easy and make it to the point where it's so easy, why wouldn't I do this? If you compared the figure to your own bank where you probably have some loyalty five days versus an average of 60 days, I don't know how far my loyalty's going to go there. It's just so easy through a process that a fintech has, compare that to the usage availability and the usage types. If I have an opportunity just to transfer the funds online, use a HELOC credit card and just swipe it and it's done, it's on my credit card--
Super easy versus the majority of lenders only offer a check. By the way, if you write that check for more than a certain amount, you may not be able to use your phone to deposit that check. You might actually have to drive somewhere and deposit that check somewhere, which in the grand scheme of things really isn't difficult, but we live in a society where we're impatient and driving somewhere to do something seems very inconvenient even to myself included in that mix. I think that's the biggest opportunity for modernization for financial institutions is to make it easy and make it almost a no-brainer for customers to think about it. "If I have a need, this is how I can get it the easiest and the quickest."
Rutger: One thing that I can tell from my personal experience, and I won't mention who my home equity line of credit is with. The challenge that I have is that within my online banking or my mobile app, I am not even able to move funds. I'm able to move funds from my checking to my savings or from my savings to my checking, but I actually need to write myself that paper check to actually move money from my home equity line of credit to my checking account, which can be quite cumbersome when you're trying to pay a contractor or someone that's just delivering windows or countertops. In that sense, that is certainly something where there could be some improvements made. Now, finally, we're asking each guest, what is a term or acronym, or lingo that you would like to retire completely that is overused, or misused?
Ken: Well, maybe think back on our topic earlier on just the product itself, we call it a HELOC. I know a few institutions call it a PCL, personal credit line, or personal line of credit. I think to perhaps, help with that modernization is to get out of that HELOC terminology, or PCL terminology. Oh, admittedly, not the most creative person in the world didn't take a role in marketing, but perhaps a modernization of what can we call this so it resonates with more homeowners?
Resonates with more consumers, if you need to tap into it, tapping into my HELOC might seem a little outdated, or unknown if you don't know what a HELOC is, or a PCL is. Perhaps, a way for banks to help modernize that is to appeal to a larger audience, and know exactly what the product is and the power which it can grant them within an instant.
Rutger: Yes. That certainly could use an overhaul, the word HELOC. It is very bank-centric. Maybe, Renovate Now, Pay Later. Maybe, that could be something that they could use. Again, I'm also not in marketing, so we'll see. We'll let the marketers think about what a better term is, but obviously, your point is well taken to make it more customer-centric. Thank you, Ken, for joining us today.
Rutger: As always, we have a (F)insight Fact that the 2022 home equity volume is on track to do about $80 billion. The last time, the industry saw $80 billion in volume was in 2019, which is when the prime rate averaged 5% in a decreasing rate environment.
I'm Rutger van Faassen, and this has been the Curinos (F)insights podcast. Helping you navigate today and anticipate tomorrow.
As always, thank you to our Curinos (F)insights team. Robin Sidel is our Director of Thought Leadership. Editing and production by our Senior Designer Adrienne Cohen. Project management by our Marketing Communications Manager Meagan Brezette. Music is by vizion-studios. I’m your host, Rutger van Faassen. You can find more insights at curinos.com. Please subscribe and review wherever you listen to podcasts.
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