Community lenders face significant headwinds right now, such as lower deposits, high cost of funds, and depressed refi mortgage volume. But at a time when homeowners are sitting on a huge pile of untapped equity and searching for home equity solutions, lenders have plenty of opportunities to keep lending local and create a competitive advantage.
By making home equity a lead product and providing fast and frictionless borrowing experiences, community lenders can navigate difficult economic circumstances and leverage home equity lending to grow their portfolio.
From the popularity of HELOCs to the availability of technology that can drastically increase volume and productivity, community lenders have a potent toolkit for meeting the needs of customers and members. Community lenders must begin to make home equity a go-to financial tool by educating customers and members on their home equity options — especially as outreach by nonbank fintechs is skyrocketing.
Despite liquidity issues and a difficult housing market, now isn’t the time for community lenders to panic or succumb to short-term thinking. Instead, lenders should be bold and creative as they consider new revenue streams and services for their customers.
The power of home equity lending
The Fed’s war on inflation has notched some important victories in recent months, which is a reminder that interest rates won’t remain at multi-decade highs forever. However, community lenders shouldn’t expect mortgage and refi volume to fully recover any time soon, which means they have to explore other ways to generate revenue and meet their customers’ evolving needs. One solution has never been clearer: homeowners have over $31.5 trillion in equity, and many are looking for ways to put it to work.
This is why interest in HELOCs and other home equity loans has surged. Between Q1 2021 and Q3 2022, refi originations collapsed while HELOC originations almost doubled. Mortgage Bankers Association reports that HELOCs rose by 50 percent in 2022 compared with two years earlier. Considering the fact that just over one-third of homeowners report that they’re “very familiar” with HELOCs, while the same proportion say they’re “a little familiar” or “not at all familiar,” lenders are missing a significant opportunity to educate and serve their customers.
As mortgage originations continue to fall, total HELOC debt is expected to increase by 8.8 percent this year and almost 10 percent in 2024. This is yet another reminder that home equity lending is a powerful tool for community lenders, especially in a smaller mortgage market.
Improving borrower experiences with fintech partnerships
Beyond diversifying their products and services, community lenders have to focus on providing exceptional borrower experiences. While giving customers and members new ways to leverage their home equity is critical, the process of doing so is just as important. This is why lenders are increasingly establishing partnerships with fintechs to make their services faster and simpler. Fintechs can help lenders develop streamlined and user-friendly processes that get borrowers from clear to close in a matter of days — instead of weeks or even longer.
The banking industry is becoming more digitized all the time — 78 percent of American adults say they prefer to do their banking online, while a majority of banking executives say they’re facing greater competition from digital alternatives. It’s no surprise that community lenders are particularly focused on fintech partnerships as key drivers of growth. Fintechs offer data-driven workflows that allow lenders to move beyond slow and error-prone manual processes, scale volume and increase productivity without expanding the workforce, and provide a much more efficient and accessible borrower experience.
There are many stubborn myths about community lender digitization, such as the idea that it requires large and expensive IT teams. This isn’t true. Fintechs can offer full integration on day one with intuitive drag-and-drop solutions, as well as ongoing support that eliminates the need for technical expertise and significant budget allocations. Fintech partnerships can ultimately reduce overhead by automating processes while generating revenue with greater loan volume.
How community lenders can distinguish themselves
It has never been more important for community lenders to set themselves apart from their competitors. Lenders can distinguish themselves by expanding their services with HELOCs and other home equity products, providing excellent borrower experiences, and continuously monitoring the competitive landscape to determine how they can add value for customers.
Home equity can be a lead product for community lenders. Beyond the major contractions in mortgage and refi volume and growing borrower interest in HELOCs, home equity lending has become a safer revenue stream in recent years. TransUnion reports that delinquency rates have been steadily falling for a decade. Community lenders are increasingly recognizing the value of home equity lending. In the fourth quarter of 2022, credit unions and local banks accounted for 61 percent of HELOC originations.
From the beginning of 2022-23, Competiscan found that home equity-related mail volume rose from 18 percent to 38 percent. This sort of data is vital, as lenders need to stay informed about what their competitors are up to. Meanwhile, community lenders need to ensure that customers are aware of their home equity options. This will simultaneously help borrowers meet their financial needs while making lenders’ businesses more sustainable and profitable. Fintechs can facilitate all the above: data collection and analysis, member engagement, and the improvement of both internal and customer-facing processes.
By orienting their business toward home equity, leveraging fintech partnerships to accelerate the lending process and elevate customer experiences, and keeping borrowers informed about the full range of their financial options, community lenders will put themselves in a strong position for growth in the coming years.
Jill Skinner is chief marketing officer for digital lending platform Coviance (formerly LenderClose).