Banks & Credit Unions Are Well-Positioned to Take Advantage of the Surging Interest in Home Equity Loans
When the COVID-19 pandemic threw the economy into crisis, many out-of-work and under-employed homeowners sought home equity loans to cover day-to-day expenses.
At the same time, many banks in the U.S. announced that they were tightening home equity loan qualification requirements.
Today, financial institutions that offer home equity loans still have stricter requirements for borrower credit scores and the amount of home equity needed to qualify.
That will create opportunity for forward-thinking banks and credit unions as demand for fixed-rate home equity loans and Home Equity Line of Credit (HELOC) loans is likely to grow due to factors including rising interest rates and the shortage of homes on the market—especially for those lenders that can also provide a digital lending experience that matches the demands of today’s consumers.
Why HELOC Demand Is Surging
Over the past year, home prices have risen sharply, and homeowners have accumulated substantial home equity that they can use to improve their homes and pay down debt.
Homeowners can use home equity loans for any purpose, such as home improvement, paying for college, or paying off high-interest credit card debt. Banks and credit unions also benefit from home equity loans because after they earn interest and fees on borrower first mortgages, they earn additional interest and fees on home equity debt. If the homeowner does not make the payments, the lender can foreclose.
"While people were increasing their debt, they were not spending cash last year," noted Omar Jordan, CEO and founder of LenderClose, who expounded upon the topic in an interview with MortgageOrb published last summer. "Community banks and credit unions saw checking and saving account balances increase dramatically. Financial institutions currently maintain record levels of cash on-hand, and through home equity loans, they can increase profit margins,” Jordan told the publication. The shortage of real estate inventory also makes this an ideal time for lenders to offer home equity loans, especially those that can offer a more personalized solution than megabanks with “one-size-fits-all policies,” he said.
The next several years are likely to bring a sharp increase in home equity loan and non-conforming loan originations as lenders look to move the cash on their balance sheets and rising interest rates drive increased consumer demand, Jordan later noted.
Fintechs Poised to Take Advantage
But to be successful in the home equity market, banks and credit unions will have to pay attention to their new competitors.
That means adopting the speed and consumer-savvy practices of the fintechs, who will also be seeking to take advantage of the same opportunity, but with a significant head start on the digital lending and easy-to-use platforms that consumers increasingly expect
Partner with MeridianLink
MeridianLink can help banks and credit unions get a running start on home equity lending opportunities. Learn more about the Home Equity module for MeridianLink Consumer: Schedule your demo today.