The Return of the HELOC Market

The HELOC business is booming, but traditional lenders risk losing market share.

Rising home values, flat wage growth, record levels of consumer debt and interest rate uncertainty have driven home equity line of credit (HELOC) loan origination to record highs. In fact, a 2018 report from Freddie Mac projects that HELOCs will continue to be a key market driver well into the future.

The good news for mortgage lenders is that they already have the inside track into this growing market because they hold the borrowers’ first mortgages. The bad news? Sophisticated non-bank lenders are leveraging key advances in financial technology (fintech) to deliver the faster, more seamless loan experience that today’s homeowners expect.

According to a recent report from J.D. Power, online lenders receive higher customer satisfaction scores than traditional home equity lenders. More importantly, that same study found that HELOC borrowers are more likely to look for alternative lending sources before choosing a home equity loan.

To compete and win in today’s digital marketplace, home equity lenders need to up their tech game.

Demographics are Changing
For decades the home equity loan business depended on baby boomers to drive sales. That was the generation that was having children and putting additions on their homes. Today, though, millennial home debt exceeds baby boomer home debt for the first time in history, and younger borrowers are becoming less likely to pick up a phone or walk into a branch office to take out a loan.

Younger borrowers increasingly expect a seamless loan process that can be initiated and completed on their mobile devices. Millennials are also more comfortable working with non-bank tech lenders (think: Apple Card) and may already have relationships with them. Consider a 2019 survey by Citizens Bank in Rhode Island that found that 60% of millennials preferred other financing options to HELOCs for their home improvement projects, compared to 47% of older homeowners.

But it’s not just younger homeowners who don’t want to go through the hassle of taking out a paper-based home equity loan. Borrowers at every age are more likely to go with the lender that offers the fastest, most frictionless option.

The Home Equity Business is Ripe for Digitalization
Because HELOCs are less complex than writing traditional mortgages, lenders can reap the rewards of automation more quickly. The key is instant access to data.

Access to third-party data can provide real-time verification of the homeowner’s employment, income and debt status, as well as insight into the current market value of the property. That means that the approval process can be cut from days to just minutes, moving more loans through the pipeline faster and dramatically reducing processing costs. Using third-party verification also frees up internal resources, meaning lenders can scale more quickly to help meet increased demand.

Because HELOC’s don’t fall under stricter government-sponsored enterprise (GSE) lending guidelines, providers can move swiftly to deliver a seamless customer experience. And borrowers can retain their low mortgage interest rates by utilizing home equity in lieu of cash-out refinances.

Non-bank Competition is on the Rise
Two studies from J.D. Power show that the HELOC industry is facing increased competition from digitally savvy fintech lenders that can deliver cash more quickly. Two-thirds of customers who obtained their home equity line of credit within the past two years considered alternative products, up from 41% just a few years ago.

Consumers under the age of 40 are far more likely to consider alternative products, such as unsecured personal loans. That’s because HELOC providers have been slow to deliver the digital experiences that today’s borrowers expect.

Another J.D. Power study found that younger generations expected more digital offerings from their lender. While 66% of all borrowers gathered HELOC information in person, 59% of millennials used a desktop for their research, and 50% used mobile devices.

“As Millennial homeownership rates increase and home values continue to rise, lenders need to be able to meet these customers where they want to be, not try to force them into the lender’s entrenched methods,” the consumer research firm concluded.

Here’s how HELOCs compare to unsecured personal lines of credit:

Gaining the Digital Advantage
Digitalization has created a tremendous opportunity for lenders to capitalize on new opportunities in the HELOC market, but engaging younger borrowers is only half of the equation. With increased non-bank competition and shrinking profit margins, home equity lenders simply can’t afford to continue carrying the excessive weight of paper-based processes.

Automating the loan process can help to boost efficiencies, cut costs and therefore, increase profits. A 2018 report from the Federal Reserve Bank of New York found that digital lenders processed applications 20% faster than traditional lenders and reported 25% fewer defaults.

Home equity lenders that are slow to adapt to changing consumer expectations and fast-evolving market conditions are likely to be left behind.