LOMBARD, Ill.—Expect home equity lending to pick up markedly in the next two years, according to Raddon, which is emphasizing that FIs will need to adjust their offerings to meet the needs of new types of equity borrowers.
The company said in a new analysis that despite how the recession impacted usage of the product, there are reasons to be optimistic about the equity lending market.
“One reason is home prices nationwide are up by one-third since 2009 as measured by the S&P/Case-Shiller Home Price Index. This has created an estimated $6 trillion of equity/home value appreciation,” said Pat Bator, Raddon senior market and product development analyst, in a recent edition of the Raddon Report. “Another reason to be optimistic is the uptick in home equity loan and line of credit demand in the next two years. Raddon Research Insights shows consumers today are more likely – extremely to very likely – to take out either a home equity loan or a home equity line of credit during the next two years in comparison to similar measures in 2011.”
Bator pointed to the Federal Reserve’s October 2016 Senior Loan Officer Opinion Survey on Bank Lending Practices that cited a moderate fraction of banks reporting the demand for revolving home equity lines of credit had strengthened on net, although credit standards were little changed for approving HELOC applications.
“The opinion survey demonstrates that many lenders continue to adhere to traditional underwriting guidelines, require solid credit scores, low debt loads, and limit loan-to-value ratios to 80% in many cases,” said Bator. “Subsequent Federal Reserve’s Senior Loan Officer Opinion Surveys since the October report reveals banks, on balance, reported little change to credit standards and demand for HELOCs.”
Raddon Research Insights shows the home equity credit borrower of the future will look much different from their current users, Bator explained.
“The research makes it known future borrowers will be somewhat younger with slightly lower income levels than consumers that are current product users. Further, the research identifies future borrowers are more likely to have lived in their homes for a shorter period of time and have built up less equity in their homes. In fact, only six out of 10 (58%) of these future borrowers have built up more than 20% in home equity value in their homes according to Raddon’s research. Consequently, a fair portion of the future borrowing market may be unable to meet lenders’ existing minimum draw requirements for home equity lines of credit or loans.”
Raddon’s research shows that one-half (51%) of future equity product users report they have “excellent” credit scores, meaning that poor credit may preclude a significant percentage of potential borrowers from qualifying and obtaining lenders’ best interest rate on their products.
“It should then be no surprise to financial institutions that many future home equity credit product users place greater importance on their ability to qualify for a home equity line of credit or loan with less than perfect credit than current product users,” said Bator.
Although future equity product users demographically differ from current users, they possess similar purposes for using or taking out an equity credit product, said Bator. Six out of 10 (62%) current equity credit product users have used their product’s proceeds to make home improvements, while one-half (49%) of future users will use the product’s proceeds for the same purpose. Similarly, one-fifth (20%) of both current and future borrowers have used/will use funds for a debt consolidation purpose.
“Raddon research shows the greatest difference between current and future users is the future users’ greater penchant to employ their home equity product’s proceeds to meet any emergency needs that may arise,” Bator said. “This designation suggests that a home equity line of credit would provide accessibility to meet this need more so than a home equity loan.”
Raddon Research Insights also shows that almost four out of 10 (39%) of all future equity credit borrowers prefer to use a home equity line of credit in an increasing interest rate environment, another four out of 10 (38%) of all future equity credit borrowers prefer to use a home equity loan, and one-quarter (24%) would prefer to use a “combination” home equity line of credit and loan.
“With a ‘combination’ home equity credit product, borrowers are allowed to take a portion of their home equity line of credit and convert it into a loan with fixed monthly payments for a set number of years and yet still have access to any additional home equity line of credit dollars they may have available,” explained Bator. “Raddon’s research demonstrates that financial institutions have an opportunity to educate consumers on the value of each equity products – loan, line, combination – in a rising rate environment. By capitalizing on this opportunity, institutions also may be able to differentiate their offerings from the competitive marketplace.”
An Executive Summary of the research is available at https://fisv.co/raddonsmallbizinsights and the full 49-page report can be purchased at raddon.com. Raddon will host a webinar on the study on June 8, 2017 for purchasers of the report.