Why mortgage lenders should invest in home equity offerings

Lenders who invest strategically and adopt digital capabilities will attract more interest in home equity loans and lines of credit.

In brief

• Homeowners face challenges accessing liquidity, presenting a substantial opportunity in home equity lending.
• Home equity products have suffered from a lack of modernization; lenders who offer a simplified, expedited origination experience will gain an advantage.
• Making the right decisions around people, processes, and technology will impact ROI on investments in home equity lending.

Buying a home is one of the most impactful financial decisions that individuals make in their lifetime. By building home equity, homeowners create an avenue to leverage capital, which can help them manage finances and debt, fund significant purchases, and invest in home improvements. However, the recent housing landscape has created challenges for homeowners seeking liquidity.

In 2021 and 2022 when mortgage rates were low, mortgage refinancing accounted for more than 60% of total home loan originations, according to Home Mortgage Disclosure Act (HMDA) data.¹ As mortgage rates soared over 7% in 2023, refinancing lost its allure to homeowners unwilling to relinquish their lower interest rate loans. Simultaneously, home equity values reached record levels. With the Federal Reserve Economic Database reporting $35 trillion in homeowners’ equity for Q2 2024 – which is near all-time highs, relative to mortgage debt outstanding – there is significant potential for growth in lending against outstanding home equity.² The demand for borrowing against home equity has been further boosted by the lock-in effect from high rates driving home improvement as an alternative to moving, as well as increasing consumer debt from auto, credit card, and student loans. Furthermore, investor demand is growing, with an active secondary market for home equity loans and lines; any further focus from the government-sponsored enterprises (GSEs) on closed-end second liens could accelerate this structural change.

Build

This approach involves developing a new platform to support home equity lending. Given the investment required, it is typically only undertaken by tech-first lenders who seek to build a competitive advantage through their own offering, maintain control over developing a custom solution, and retain the intellectual property.

Buy

Many leading loan origination systems (LOS) have home equity offerings. The right LOS, combined with point of sale, can drastically reduce the cycle time and cost associated with originating home equity loans (HELOAN) or lines of credit (HELOC). Following implementation, personnel with the right expertise must be in-house to run the operation. It can be more cost-effective and result in faster speed to market, relative to building the platform in-house.

Partner

Top home equity lenders offer white label services to originate on another firm’s behalf. For many firms looking to offer a digital HELOC or HELOAN, this becomes the path of least resistance. This can enable originations with lower operational costs, with the trade off on customization of the process and experience. When partnering, key decisions must be made on which aspects of the offering the partner will control.

Adapt

Many lenders have recently revamped their loan origination system and supporting processes. Most major LOS can be configured to support HELOCs, particularly when paired with digital third-party solutions; the right scale is critical to a profitable offering. EY research indicates that most consumers prefer to execute banking transactions digitally. By providing a user-friendly interface accessible via online and mobile platforms, potential borrowers can easily apply for and manage their home equity loans and lines.

The above framework is not one size fits all, but common themes drive success regardless of the approach selected. First, improving lead generation allows lenders to capture more of the demand at a lower acquisition cost. Second, using modern technology is essential for quickly originating loans and lines of credit. Finally, a seamless, compliant customer experience is critical to avoid introducing undue risk. By strategically modernizing their operations and enhancing the customer experience, lenders will be prepared to capitalize on the growing demand for home equity lending.

Adam Williams, David Kaiser, Jonathan Pryor, and Daniel Yero contributed to this article.