Key to Strong HELOC Volume Identified

By Ray Birch

CHICAGO—Economic conditions are right for a comeback in home equity lending this year, says TransUnion, which is forecasting a solid year for the product—but only if lenders can focus on consumer education.

Satyan Merchant, SVP automotive and mortgage at TransUnion, told CUToday.info there is significant equity in homes that can be tapped this year, and that consumers’ reliance on other lending products for home repairs and upgrades is fading as rates have climbed.

“There is over $20 trillion in untapped home equity in 2024, and that's based on the fact home values continue to either rise or largely remain level,” explained Merchant. “They're just very few areas in the U.S. where home values are going down.”

As credit unions and other lenders experienced, during 2020-2021 a favorable option for many homeowners was a cash-out refinance of their first mortgage.

“They were also not only capturing the equity but also capturing a lower interest rate,” Merchant reminded. “For many consumers today, refinancing and cashing out is not a good idea in the higher-interest-rate environment. That's why we believe there is a good opportunity for consumers to enter the home equity market.”

Like a Simmering Stew

Merchant is predicting the opportunity will build slowly this year.

“Home equity lending, it's like a stew simmering,” he said. “Today it might be a little bit slow in terms of activity. But interest rates are expected to come down, maybe a few rate cuts this year. If that continues it opens up the opportunity for consumers to enter the home equity market.”

Merchant said credit unions shouldn't assume all consumers are up to speed on home equity.

“They may have to start doing more home equity advertising. I think there is an important educational component here,” he said. “For example, in a low-interest-rate environment, we believe consumers were opting for other types of loan products, such as an unsecured personal loan through a fintech that made it really easy to just simply get their hands on $10,000 or $20,000 for a remodel. It was point and click. It was online. And it was an unsecured lending product in a low-interest-rate environment.”

The Competitive Landscape

Those sorts of products tend to be very competitive in that type of rate environment, Merchant said.

“However, in a high-interest-rate environment, home equity products tend to be the most competitive, from a price perspective,” he said. “Again, while we're in the higher-interest-rate environment, consumers may not be familiar with the home equity products, as others were in the past.”

Satyan Merchant

Merchant noted home equity products have not been “in vogue” in the last few years.

“Therefore, consumers may not be as familiar with the offerings,” he said. “I would suspect there's a generation of consumers who have probably never had a home equity product.”

End of Draw Period Approaching

Merchant also added there are a large number of outstanding home equity lines of credit—taken out when home equity was popular—that are coming to the end of their draw period.

“We expect there are about 400,000 accounts reaching this point in the next 12 months,” he said. “That adds to this opportunity. We have a solution at TransUnion that helps lenders identify who is at the end of their draw period. So, lenders can proactively reach out to a consumer in the next 12 months and say, ‘Did you know in August that your home equity loan or line of credit is reaching the end of its draw period? Would you like to take another home equity loan or line of credit?’”

Big Challenge Remains

Merchant added there remains a big challenge in the industry linking the property value a homeowner has with the existing balance on their mortgage.

“And particularly when that consumer has multiple mortgages on that property,” he explained. “What we are talking about here is the combined loan to value, meaning combined loan to value on a single property. I have a home. I have a first mortgage. I have a second mortgage, which is a home equity line of credit. The combined home loan to value would be a calculation of the current estimated home value and that ratio of the amount that I owe on all of my loans on the property, against that current valuation. That, in and of itself, is challenging.”