Will home equity lending ever recover?
When Shaun Richardson decided to tackle a landscaping project in his backyard, he went to his bank so he could tap into the equity he’d accumulated in his home.
As senior vice president at the research firm Informa Financial Intelligence, Richardson knows home equity products well, so he prepared all the documentation he needed and submitted it to the bank. Forty days later, he was still awaiting an appraisal from the bank.
Fed up by this point, Richardson applied for an unsecured personal loan from an online lender on a Friday night. He was approved the next day, received an offer on Monday, and the cash hit his account by Tuesday. The money came at a fairly competitive rate, too, of 5.19%.
“I’ve seen the numbers, I’ve seen the trends, I talk about the trends, but I’d never really felt it from a consumer perspective and it really kind of frustrated me,” he said.
Richardson’s story illustrates some of the challenges facing home equity lending today. Outstanding balances on home equity lines of credit have steadily declined for the past decade, even as consumers are sitting on record levels of untapped equity in their homes. One estimate by TransUnion puts nationwide home equity at close to $15 trillion, or $1 trillion higher than its previous peak in the first quarter of 2006.
The decline in HELOC volume can be attributed to an assortment of factors, not the least of which is competition from upstart online lenders that can offer personal loans in a matter of days, not weeks. Though banks and credit unions, by and large, still offer the best rates, many consumers simply don’t want to wait a month or more for their money when they have many other options at their fingertips.
Bankers say that volume has also declined because, since the financial crisis, many consumers have become wary of borrowing against their homes, or they have taken advantage of low interest rates to refinance existing mortgages and take cash out. New tax laws may have also made HELOCs slightly less attractive than they once were, industry experts say.
Yet some bankers say that with the right process improvements and a little consumer education, home equity can make a comeback.
HELOCs’ rise and fall
Home equity borrowing increased rapidly in the years leading up to the 2008 financial crisis, and some of the decline is because consumers have paid off those pre-recession balances. Joe Mellman, senior vice president and mortgage business leader at TransUnion, said new originations of HELOCs did grow between 2012 and 2016, but not enough to offset the pace of paydowns.
“You have a dynamic where people are paying off more in balances of their existing HELOCs than consumers are taking out in new HELOCs or tapping in existing HELOCs,” he said.
According to data from the Federal Reserve Bank of New York and Equifax, outstanding balances on home equity lines of credit more than doubled from $240 billion in the first quarter of 2003 to $660 billion in the first quarter of 2008.
Outstanding balances on HELOCs hit their peak of $710 billion in 2009, but they’ve declined nearly every quarter since then and totaled $406 billion in the first quarter this year. Over the past five years, balances in all other major consumer loan categories, including student, auto and credit card loans, have steadily increased, according to the New York Fed.
More recently, some consumers have favored cash-out refinance loans over HELOCs because they offer more attractive rates, said Informa’s Richardson. In mid-2016, the rate on a cash-out refi averaged 3.79%, compared with 4.59% for a HELOC. Since then, the spread between the two loan products has only widened, generally by about 100 to 120 basis points, Richardson said.
Consumer attitudes also play a role, said Brendan Coughlin, the president of consumer lending and deposits at Citizens Financial Group in Providence, R.I. Some consumers are simply nervous about borrowing against the value in their homes, possibly because they knew friends or family who lost their homes during the recession.
Consumers might also shy away from home equity lines because they don’t understand the product, he said. Bankers blame misperceptions about the 2017 tax reform bill, which eliminated the tax deductibility of HELOC interest except when used for home improvement. Bankers say that many consumers don’t realize they can still deduct the interest on a HELOC for specific uses, making it one of the cheapest options available to those borrowers.
“There’s a lot of confusion" about the tax law changes "and that has not helped when people are thinking about using their home equity,” Coughlin said.
Crucially, many say the process of tapping into one’s home equity is longer and more complicated than it needs to be. Fintech firms, such as Figure Technologies, have noted the decline in home equity balances and corresponding rise in unsecured personal lending and seen an opportunity.
“This is a market that’s ripe for disruption,” said TJ Milani, vice president of finance and strategy at Figure. “The process is very onerous. It’s anywhere from four to eight weeks, lots of time, lots of fees, etc., so we said, ‘this is something we can focus on.’”
Founded by former SoFi CEO Mike Cagney, Figure’s signature product is a home equity line it can approve in minutes and fund within five days. The San Francisco firm relies on technologies like automated valuation models for appraisals and electronic notarization to approve and close those loans in such a short time.
Figure has originated a little over $200 million worth of HELOCs since it started lending in October 2018 and $80 million of those closed in the month of May alone, Milani said. Figure offers lines ranging from $15,000 to $150,000 with rates ranging from 4.99% to 12%. Figure’s borrowers typically have a FICO score in the range of 730 to 740, he said.
There are other online options as well, and sometimes even prime borrowers will turn to them, opting to pay higher rates in exchange for getting their loans funded faster and with less paperwork. While Figure specializes in home equity lines, other online lenders, like LendingClub and SoFi, offer personal loans often marketed for similar uses that a consumer might have for a HELOC. Consumers can even choose a point of sale loan when buying furniture and appliances — items for which they might have once used a HELOC.
To be certain, banks and credit unions’ big advantage is that they offer better rates. The rate on a personal loan from LendingClub, for example, can range from 6.95% to 35.89%, while HELOC rates are currently averaging 6.55%, according to Informa.
Banks fight back
Some bankers say they have made process improvements to speed up time it takes to approve and fund HELOCs. They also say it’s important to communicate with consumers, both about the advantages of HELOCs and to set expectations upfront about the process.
The $28 billion-asset Webster Financial in Waterbury, Conn., has focused on making back-office improvements to the way it handles home equity applications, said Matt Cammarota, the senior vice president of consumer finance at Webster.
For example, the bank routes applications into different work streams based on their complexity. A less complex application — say, from a customer who earns a wage, and is not self-employed — goes to one team, while a different team handles more complex applications.
Through a series of process improvements, Webster Bank has reduced the time to close a HELOC application by an average of 10 days.
Webster has also pinpointed a specific time in the application process when consumers tend to get frustrated and drop out and aims to close applications before they get to that point.
Before Webster began those process improvements in 2016, the bank closed a typical HELOC application in an average of 28 days, but has since cut that time down to 18 days, Cammarota said. It’s also reduced the rate of would-be borrowers who drop out at some point in the process, from 26% to 19%.
Meanwhile, the $161 billion-asset Citizens has invested heavily in data and analytics both to scout prospects and approve would-be borrowers faster. The bank has seen success in soliciting new prospects via direct mail offers, Coughlin said. It also uses data it already has in-house to preapprove and nudge existing customers.
Since making those improvements over the past 18 months, Citizens has cut its funding time from an average of 55 days to 30 days, and Coughlin said that about 50% of HELOC borrowers are approved within three weeks.
Banks could think about other ways to improve on the process, Richardson said. A customer with a landscaping project might be able to wait a month, but a customer with a leaky roof needs that money as soon as possible. Banks could consider offering a small, unsecured personal loan to customers to meet an urgent need, while they work on approving them for a larger HELOC, he suggested.
“There are different things they could think through creatively to solve the customer’s need. The customer doesn’t care if they have a line of credit, an unsecured loan, or a cash-out refi,” he said. “They’re trying to accomplish something and they need the funds. They don’t care what you call it.”