Securing a Competitive Advantage in a Challenging Housing Market

This article was originally published on CUInsights.

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This has been a challenging year for mortgage lenders. As rates rise, mortgage originations continue to fall, making competitive differentiation more important than ever to win market share.  Lenders are under increasing pressure to diversify products, educate customers about alternative financial solutions, and focus on providing digital-first borrower experiences. Despite the market headwinds and shrinking origination volumes, lenders can emerge stronger if they act quickly on industry trends and elevate customer experience. 

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One of the most important trends in home equity is the soaring rate of HELOC originations, which almost doubled between the beginning of 2021 and the end of last year. At a time when homeowners are reluctant to refinance due to higher interest rates, they’re deploying tappable home equity to pay off debt and cover expenses. After years of extremely high refi volumes, borrowers need new solutions that will help them adapt to a different economic environment, which is why HELOCs will remain popular in 2023. 

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Market conditions call for a different lending approach

Although the Fed decided to pause interest rate hikes at its June meeting, this was after fifteen straight months of rate increases. Meanwhile, refi originations plummeted from over 1.5 million at the beginning of 2021 to just 39,000 in the third quarter of 2022.

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This level of refinance volume is likely to remain low for the foreseeable future. According to Redfin data, the large majority of Americans have mortgages below today’s rates - at the end of 2022, 62 percent of mortgage holders had a rate below 4 percent, and 82 percent had a rate below 5 percent. A whopping 92 percent had a rate below 6 percent. America holding mortgages below 3 percent, it means they may feel held hostage by the low rate even if they dislike the home. As homeowners turn to scratch the home improvement itch, borrowers will need to look at tapping into home equity as a potential funding source versus the cash-out refinance option of the past.  

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While tappable home equity has declined with the slight dip in home values, it’s still expected to be at the historically high level of $18 trillion by the end of the year. The average American still has $173,000 of tappable equity in their home.  

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The shrinking mortgage market is forcing banks, credit unions, and fintechs to compete for a smaller pool of customers. Beyond providing a wider array of financial options to borrowers, lenders need to improve customer engagement, elevate user experiences, and streamline lending operations to maintain a healthy lending program. 

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The borrower experience has never been more important

Banking has undergone a fundamental transformation in recent years – 78 percent of American adults say they prefer to bank digitally, and this trend will continue to pick up momentum. The use of mobile banking alone shot up from 15 percent in 2017 to 43 percent in 2021. Borrower expectations are evolving rapidly, and lenders need to be capable of providing accessible, streamlined services and experiences if they want to set themselves apart. It’s no wonder that 89 percent of banks say fintech partnerships are important. 

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Fintechs can drastically improve the borrower experience by replacing time-consuming and error-prone manual processes, making the loan application and approval process more efficient and increasing the quality of engagement with borrowers. 

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The Coviance Home Equity Express (HEx) platform allows lenders to go from clear to close in a matter of hours (rather than weeks). Coviance customers reported a 36 percent increase in lending productivity without hiring more staff. 

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Education is crucial for lenders and borrowers

Lenders have a responsibility to educate customers on the available financial solutions that meet their unique needs. As the housing market and broader economic conditions have shifted, HELOC and HELOAN education should play a larger role in organizations to help customers navigate these changes. It’s especially important for lenders to educate homeowners on their tappable equity as HELOCs prove to be an essential financial lifeline for many borrowers. 

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Lenders are quickly reacting by increasing their marketing outreach. According to data from Competiscan, home equity email volume jumped by 158 percent from Q4 2022 to Q1 2023. And mail volumes are up, too, with home equity offers as a proportion of total mail volume increasing from 18 percent in Q1 2022 to 38 percent in Q1 2023. These are stark reminders that lenders need to increase their focus on borrower outreach and differentiated offerings – if they don’t, they will be left behind by competitors that prioritize education, along with fast and easy experiences. 

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While the headwinds in purchase and refinance will continue, lenders can adapt to their customers’ needs by capitalizing on the demand for HELOCs, developing more intuitive and efficient customer experiences, and educating borrowers on how they can put their hard-earned equity to work.

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