Evolution of Home Equity Lending
Anticipated loan demand is finally increasing after steadily falling since the financial crisis of 2007/2008. Raddon’s 2017 national research indicates 28% of consumers anticipate opening a loan in the next 12 months. This demand for loans has increased significantly from a low of 19% in 2015 and just 21% last year. Home equities are among the products showing increasing demand. The increase in demand is being fueled by rising home prices (up by one-third since 2009) and lower inventories of houses on the market.
Recent regulations are having a major effect on the design of home equity products. The most impactful regulation is the TILA-RESPA Integrated Disclosure (TRID) regulations of August 2015. Since TRID was implemented, most banks have started offering home equity lines of credit with an option to lock in a portion or all of the balances into a fixed rate, fixed term product. Some of Raddon’s clients have moved to this “hybrid” model as well. Raddon expects this hybrid product will grow in popularity and become the new model for equity lending.
In Raddon’s newly released 2017 study: Lending Insights: Loan Demand Rebounds but Challenges Persist, we asked consumers about their preference for home equity products in a rising rate environment. Consumers are more reluctant to select the traditional variable rate home equity line of credit and nearly a third of consumers expressed interest in the newer hybrid equity line/loan. Homeowners want to protect themselves from the impact of rising interest rates in the future.
Raddon’s Performance Analytics (June 2017 data) shows stronger household penetration and growth for HELOCs versus home equity loans. Households with home equity products have a strong relationship with their financial institution and typically belong to the most profitable household segment – the “A” profit segment (annual household profit of at least $500 or more per year). Total deposit and loan balances are also very strong for these households.
Do Financial Institutions Offering the “Hybrid” HELOC Perform Better?
Raddon’s clients have been rolling out the hybrid HELOC products over the last few years. One of the key benefits of offering the hybrid HELOC is it’s an evergreen lending product. It is the one loan the consumer applies for once and can be used for as long as they remain in their current house. As they pay down the fixed segments of the loan the available line grows and those funds can be reused for another purpose.
Shown below are some key performance statistics for two Raddon clients who offer hybrid HELOC products. Consistent with our national data, household penetration is much stronger for the clients offering the hybrid HELOC versus the standard HELOC based on June 2017 Performance Analytics results. The account balances are at least as high as what we see on average and one is significantly higher. Growth in balances and households exceed the standard product offering. Profit varies by institution but household profitability is strong for both.
The chart below shows results for two clients who offer the hybrid HELOC.
Institutions considering offering hybrid HELOCs will need to think about a number of issues, including how they structure interest rates, fees, payment options and other considerations. The table below shows how most hybrid HELOCs are structured.
Raddon believes this product will continue to grow and become the new model for home equity products. Given the forecasted rising rate environment, a hybrid HELOC provides benefits to both the borrowers and lenders. However, this product is more complex for institutions to implement and loan systems may restrict the product offering. Furthermore, staff training and education is critical to the successful implementation of this product. Your Raddon Strategic Advisor is ready to help you in the process.