In recent years, a strong home equity lending market has been supported by a relatively stable, low rate environment. However, as the industry transitions into a new decade, some are already anticipating changes ahead.
Perhaps the biggest anticipated impact is tied to the Tax Cuts and Jobs Act of 2017. The Internal Revenue Service eliminated many of the mortgage interest deductions on home equity loans and lines of credit (HELOC) by suspending “from 2018 until 2026 the deduction for interest paid on home equity loans and lines of credit, unless they are used to buy, build or substantially improve the taxpayer’s home that secures the loan.”
So as we head into 2020, what are some of the characteristics of today’s home equity market and where should lenders be focusing their attention?
The Shift to Digital and the Emergence of the Fintechs
The market has not been immune to the so-called “Amazon Effect.” Consumers, who have had their expectations set by retail and other industries and want a faster, digital lending experience and have shown a preference for working with lenders who can provide that to them. In order to compete in this new digital landscape, lenders are pressured to limit the loan documentation process in the name of rapid approvals and improved customer experiences.
This is compounded by the fact that borrowers now have many more credit options available to them. A host of fintechs and digital personal loan companies are aggressively targeting new borrowers and those borrowers are gravitating toward whichever path provides them with quicker access to funds.
The battlefield between traditional home equity lenders and personal loan fintechs today is focused on smaller loan amounts, typically less than $10,000. For larger loan amounts, particularly in the $50,000 range and above, home equity lenders still dominate the market due to their ability to provide access to funds at much lower rates. This may change over time as fintechs become more mainstream and continue to partner with established large financial institutions that can support larger loan amounts and loan portfolios.
The Overlooked Generation
While the Baby Boomers have the numbers and have traditionally garnered the most attention, the greatest home equity opportunities may now lie with members of Generation X. This group of people born between 1965 and 1980 are now squarely in middle age. They are increasingly referred to as the “sandwich generation” because they often find themselves financially contributing to the support of both their Millennial and Generation Z children and their aging Baby Boomer parents.
This shift is reflected in current home equity lending trend data as well. The data indicates that some Generation X borrowers tend to favor cash out refinances as a preferred option over home equity lines of credit, particularly in the $50,000 to $75,000 range (based on an average loan balance of $484,000). Generation X is looking for faster, direct access to cash to put towards things like the home improvements needed to accommodate Baby Boomer parents moving in; college tuition for their children; debt consolidation; or unexpected medical bills of their own. Understanding these unique financial needs of Generation X will be key to lenders as they direct marketing and advertising resources to target a new generation of customers and grow market share.
Lenders will also need to have increased infrastructure and resources in place to support a group that is comfortable with mobile technology and navigating a digital customer experience. At the same time, lenders will need to understand that Generation X still appreciates the option of high-quality person-to-person interactions, making it important to support both.
Maximizing Opportunity in 2020…and Beyond
With the industry anticipating a gradual rise in interest rates, a shift away from home equity lending toward more of a first mortgage lending environment could be likely. That said, there is still opportunity for lenders who are thoughtful in their approach to targeting the market. In addition to demographic opportunities with Generation X, there are geographical pockets that will continue to support healthy home equity lending volumes as well. For example, since 2015, 20 U.S. states have seen home price increases of more than 20%, and eight states (Colorado, Florida, Idaho, Nevada, Oregon, South Dakota, Tennessee and Utah) are up by more than 30%.
As we head into a new decade, one thing seems certain: the home equity lending market is poised for change. Whether it’s due to demographic shifts, changes in the economy, or new competitive entrants into the market, those lenders that take a more data-driven, strategic approach to home equity lending will be better positioned to meet the needs of tomorrow’s borrowers.
Jennifer Henry is Vice President of Strategy and Marketing with Equifax Mortgage & Housing Services. She is responsible for pricing, product management, product marketing, campaign management and mergers and acquisitions. Henry brings more than 20 years of experience to her position at Equifax, including operations, technology, marketing, sales, product management, mortgage loan quality and loan origination services. Prior to her position at Equifax, she held leadership roles with First American Mortgage Solutions and Fannie Mae.