By Ray Birch
FOND DU LAC, Wis.–With increasing demand for home equity products as consumers stay home and make improvements, one expert says lenders have to work hard to make HELOC borrowers out of consumers who don’t already have a first mortgage with them.
“The housing market is tight right now. People know that,” said Keith Marvel, VP of sales for Miniter Group. “A lot of homeowners, instead of shopping for a new home, are instead improving what they have. Home equity products are in greater demand.”
Home equity, too, will help lenders keep their mortgage portfolios growing as the red-hot first mortgage market begins to cool, Marvel said.
“A key question, said Marvel, “is how does a lender get HELOC business from more than its existing first mortgage base.”
The data show it’s not an easy question to answer. Adding to the challenge are the findings in one recent study from the analytics firm Nomis that offer some insights into the mentality of the home equity borrower.
“The Nomis study shows only 32% of respondents looked at getting a home equity loan from a bank where they did not have their first mortgage,” Marvel explained. “Sixty percent went to their primary financial institution. You can see how difficult it is for a non-incumbent financial institution—an organization that does not hold the potential borrower’s first mortgage—to woo over and win a new home equity customer.”
According to Marvel, when consumers were asked in the Nomis study, “How many home equity lenders did you apply with?” the survey found incumbency played a major role, with 50% claiming they applied to just one lender—indicating that one-half of consumers did not price shop for their HELOC.
Attitudinal Sensitivities
The Nomis report also looked at attitudinal price sensitivity by asking, “If another bank had offered you a better rate on your HELOC, would you have accepted it?”
The responses:
- Just 42% responded with an unqualified ‘yes.’ Of the remaining, 20% said yes, but only if it’s 0.25% better.
- Another 29% said the rate needs be at least one-half to a full percentage point better.
- A small group (4%) would have been lured by a limited-time appeals promotional rate.
Marvel said the challenge is simple but not easy as non-incumbent lenders will need to try harder than incumbent banks to win new HELOC business.
Keith Marvel
He suggested, too, an incumbent may need to bundle in other services or benefits in order to keep that borrower—especially with offers from low-price leaders.
What the Nomis survey findings make clear, said Marvel, is a credit union needs to know their local home equity market well, and exactly what their competitors are doing.
And how do consumers shop for a home equity loan—for example, online or in person? The data show it varies by age. Overall, the Nomis results show a fairly even distribution, from “no research” (13%) to 25% looking at three or more lending sources and 20% conducting diligent research on a comparison website.
Some Did Research
But the under-35 age group performed some form of research, with a slight tendency to researching three or more lending sources, the study shows.
When asked about visiting a banker in person to discuss a HELOC, the under 35s are more likely to visit the lender in person. In fact, 60% visited at least two lenders in person, the report says.
Another way to expand the home equity portfolio, emphasized Marvel, is to expand the range of borrowers for which the credit union will write HELOCs.
He noted that many lenders, as a result of the pandemic-induced economic crisis, either retreated from the market, raised qualifications to borrow, or moved off home equity products.
“There's plenty of capital; now it's just a matter of the lenders getting comfortable getting their toes back in the water and going after this business,” said Marvel.
Equity Protection Programs
Marvel explained that equity protection programs, such as one Miniter Group offers, allow lenders to reach deeper into credit scores and to also expand combined loan to value—the combined LTV from the first and second mortgage.
“This simply expands lending opportunities to grow your portfolio,” he said. “You do so in a way that doesn't put the balance sheet at risk. The product is a single interest credit default product and it's meant to safeguard the institution against default from the borrower. So, most banks are tapped out at 80 to 85 CLTV and they may require a 720 FICO score to get the higher CLTV. Credit unions are really embracing the product more than the banks. The credit union can pick the certain FICO score and CLTV buckets they want to ensure against credit default. If the loan goes bad, they file a claim and they're out of the deal, and no foreclosure.”
Marvel said he will be sharing the findings and more in an upcoming free webinar from Info-Pro titled, “Home Equity Lending Trends & Loan Growth Opportunities” on June 8, from 1 p.m.-2 p.m. For info, click here.