Part One of a Series on HELOC Lending
What is the most significant generator of wealth for Americans right now? According to the Federal Reserve’s Survey of Consumer Finances, it’s the increasing appreciation of their homes and real estate. The survey found that the median net worth of home owners increased 15 percent since the previous report in 2013, largely due to the rebound in housing values across the country. On the other hand, renters saw their net worth decline five percent in the same period.
This increase in wealth, combined with strong consumer confidence for the future, creates a growing interest in leveraging home equity for home improvement and remodeling initiatives.
According to Black Knight Data & Analytics, the nation’s mortgage-holding homeowners have a collective $5.4 trillion in "tappable" equity, which is $3 trillion more than they had in 2012. This significant increase in equity wealth could drive an increase in home equity line of credit (HELOC) originations over the next few years. This is particularly significant for financial institutions because HELOCs still tend to be an institution-offered secured lending product.
Factors Impacting the HELOC Market
For consumers, home equity often provides a low-cost option for accessing cash for major purchases. Traditionally, consumers have used HELOCs for everything from home improvement projects to reducing credit card debt to financing higher education.
However, the recently passed tax law provides incentives for borrowers to limit HELOCs to certain categories. Under the new law, interest payments towards a HELOC are only deductible if the money is used to make “substantial improvements” to their home and all combined mortgages on a property are less than $750,000.
That’s not to say that other uses of a HELOC can’t be leveraged, but the tax implications must be considered by the borrower when deciding if the line of credit is beneficial to them. In some cases, consumers may still decide that the lower interest rate of a HELOC is worth the trade-off of using their home for collateral and not being able to take advantage of the tax deductions on interest for certain situations – paying off very high interest credit cards, for example.
Despite the tax changes, how large will the market grow? TransUnion projects that 10 million consumers will originate a HELOC between 2018 and 2022. This would more than double the 4.8 million HELOCs originated in the previous five-year period (2012-2016). Financial institutions need to be prepared for the demand and understand how to identify those customers who present the best opportunity for a new HELOC. At the same time, there are a few factors to watch for to reduce the risk of default.
Building a Customer-Focused HELOC Program
HELOCs face competition from several sources, and one of the fastest growing is the easy availability of unsecured personal loans from non-bank lenders, such as Best Egg, Sofi and others. In the past few years, consumers have become accustomed to applying for, getting approved and closing on nearly all loan types outside of mortgages in a matter of minutes and completely online.
To compete, lenders must look at HELOCs as an extension of their digital lending programs. Is it easy for customers to apply for a HELOC and get an initial decision on their application online? Or does your HELOC program require the borrower to call a loan officer during business hours and begin the loan process?
Once the loan has been approved – or even provisionally approved – lenders need to be able to handle all the paperwork electronically – deliver loan documents, receive supporting documentation from the borrower and finalize signatures on the loan documents.
Ready to optimize your HELOC program? The next blog in this series will look at some of the specific factors supporting HELOC growth as well as how to mitigate the risks involved.
Docutech can help lenders streamline their lending document process and improve the customer experience from mortgage, to HELOC to unsecured personal loans.