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John Geertsema
Helping homeowners tap their equity is a serious growth opportunity for lenders today. Home values have risen steadily since 2012, while household mortgage debt has remained relatively flat. This sustained growth has been a catalyst for increases in household wealth. Additionally, homeowners are keeping their houses longer, contributing to a lack of supply and spurring home improvement spending. While the use of unsecured loans and credit cards continues to increase, traditional home lenders, especially those with large servicing portfolios, have a unique competitive advantage.
By identifying customers with significant home equity value, lenders can target a sizable market to cross-sell home equity products and serve customers’ needs to fund home improvements, pay off credit cards and student loans, or make other large purchases.
The Facts
Increasing Home Price Appreciation: Available single-family home inventories remain low, contributing to record-high real estate values which reached $26.1 trillion in the first quarter of this year compared to $16.3 trillion in the first quarter of 2012.
Steady Household Debt: Household debt for the same period remained relatively flat at $10.3 trillion resulting in $15.8 trillion in unencumbered equity.
Bob Cardwell
Rising Consumer Debt: In contrast, consumer debt continues to climb to record levels surpassing $4 trillion in the fourth quarter of 2018, driven by increased credit card spending.
Mortgage Rates Slowly Rising: While interest rates have declined since late 2018, most see the cycle reversing with rates remaining flat or rising slowly into 2020. Freddie Mac recently revised forecasts for the 30-year mortgage rate to increase modestly to 4.2 percent in 2020.
Existing First Mortgage Rates Are Low: Data from the Mortgage Bankers Association in 2018 shows borrowers with existing rates below 4 percent hold 60 percent of home equity.
These conditions seem ripe for a resurgence in home equity products. While traditional lenders have been hesitant to re-enter the market, those willing to make investments have an opportunity to expand existing relationships and attract new customers, especially millennials.
Strategic Considerations
When developing their strategy, lenders should consider the following:
Harnessing Data for Marketing: First lien servicers have a wealth of consumer and property data at their disposal. Combining existing data with external data sources can help lenders develop marketing campaigns that anticipate and align with customer buying patterns. Communicating the right messaging to connect with consumer sentiment early on is critical for conversion.
Digitization of the Product Channel: As Millennials become a larger part of the customer landscape, their shopping and purchasing behavior will force change to traditional models. Developing an end-to-end digital sales and service channel will be critical to maximizing a home equity product strategy built on controlling costs and offering competitive pricing.
New Products: Fresh product features are critical for lenders to establish and maintain market differentiation. Non-bank and fintech lenders continue to penetrate the market by leveraging new technologies to create innovative products, such as Point, Figure and LoanSnap. Traditional lenders now need to do the same.
Education: Many borrowers, especially those new to the mortgage market, may be reluctant to consider an equity product for a large purchase vs. traditional sources of funds. More consumers are initiating product research online. Lenders must develop product tutorials as part of their messaging strategy to minimize confusion and create competitive differentiation.
Improved Risk Management: Servicing second liens presents unique challenges. Early intervention is critical at the first sign of financial distress. Effectively monitoring portfolios using off-the-shelf or bespoke analytics is a necessity for managing risk, as is deploying proactive analytics to mine portfolio health. Cross-referencing customer data with other attributes such as geography and property type and leveraging the latest AI techniques for modeling can significantly limit exposure as the home equity portfolio grows. Additionally, servicing both first and home equity loans on a unified platform like Black Knight’s MSP improves both risk management and operational efficiency.
As the retail housing market continues to evolve at speed, traditional lender/servicers must educate customers on the value of home equity products and design unique products. This will help them to insulate themselves from rapid market fluctuations while securing new sources of revenue – a win-win for all.
John Geertsema is a managing principal with Capco. Bob Cardwell is a managing principal with Capco and leads its consumer finance and fair banking practice group.
