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Open banking and property data can help target, educate and quickly approve loans for homeowners.
Skyrocketing property values during the pandemic have left U.S. homeowners with historically high levels of home equity. Last year, the average homeowner had $300,000 in tappable equity, according to data from CoreLogic.
As interest rates rise but home prices remain stubbornly high, many Americans will likely choose to remain in their current home for the foreseeable future. Instead of refinancing, many will opt for less rate-sensitive home equity products, especially if they’re looking to renovate. In fact, TransUnion forecasts predict that home equity originations will increase by 24% in 2023.
These trends present a massive opportunity, and this year, credit unions are shifting their lending strategies to focus on home equity loans. According to CUESolutions provider Cornerstone Advisors’ 2023 “What’s Going on in Banking” report, home equity loans are among the top lending priorities for credit unions, with 59% focused on home equity this year. The only lending category that ranks higher than home equity in 2023 is auto loans.
However, consider the process for getting approved for an auto loan compared to a home equity loan. Some credit unions offer online auto loan applications, and applications can often be approved within the day or a few business days at most. In some cases, a member could apply online, get approved and receive funding all within the same day.
Yet getting approved for a home equity loan can take anywhere from weeks to months in some cases, resulting in a frustrating experience for homeowners, which are among the most valuable member segments for credit unions.
With that in mind, what does the latest home equity boom mean for credit unions and their relationships with homeowners?
Home Equity Boom Presents a Window of Opportunity for Credit Unions
Americans achieved record-high levels home equity in 2022. However, tappable home equity is expected to decrease by 6.5% year-over-year between Q4 2022 and Q4 2023 by $1.3 trillion, dropping from $19.4 trillion to $18.1 trillion. This decrease is expected to be a result of the eventual decline in home prices in conjunction with falling balances due to pay down rates.
Despite the anticipated decrease, the amount of available equity that homeowners have in their homes will remain sizable in 2023, and according to recent survey data from MeridianLink, 21% of Americans are likely to take out a home equity loan in the next 12 months.
Given the current demand for home equity loans, combined with the impact of rising rates, credit unions must act swiftly to engage homeowners and address their financial needs in today’s market.
Traditionally, credit unions competed with banks for home equity loans, but now they must also compete with fintechs and other alternative lenders. For example, Rocket Mortgage started offering home equity loans in 2022. Guaranteed Rate, loanDepot and others also rolled out new home equity and HELOC products last year. Clearly, fintechs are already capitalizing on current strong home equity positions and many are promising an easy, online application process with fast approval and funding times. Some fintechs are even promising approvals in mere minutes, with borrowers receiving funds in as little as a week.
The good news is credit unions can significantly enhance their home equity offerings and make it easier for homeowners to tap their equity without waiting weeks or months to get approved and access funds.
To start, screening tools can help determine who makes a good prospect, looking at homeownership, equity, debt and other factors. Greater access to open banking data and external data will make this possible. Credit unions already look at credit score data to make loan offers. However, a credit score does not provide the full picture of a homeowner’s finances.
Homeowners also have unique property data, including their home’s value and the interest rate on their mortgage, that impact their financial options. Today, this property data is not easily accessible for credit unions looking to personalize financial recommendations and product offers, but open banking is changing this.
Additionally, property data can be embedded and monitored within a credit union’s online and mobile banking, giving homeowners access to actionable advice about their home’s value, home equity, borrowing power and pre-qualified offers—all at their fingertips.
Engage Today’s Generation of Homeowners
Homeownership is one of the most important ways members can build and maintain wealth. However, for many homeowners, especially first-time homebuyers, it’s not always clear how to maximize their investment. This is an excellent opportunity for credit unions, which are perfectly positioned to educate homeowners about how their home is an asset, how it impacts the financial options are available to them and how to best leverage those financial options.
For example, home equity loans can unlock financial stability by allowing homeowners to consolidate and pay off debt. This is especially timely, as the nation continues to grapple with inflation and total household debt levels surged to $16.5 trillion in 2022, an increase of more than 7% from 2021. And it seems more homeowners are willing to tap their home’s equity as a way to get out of debt, as debt consolidation was named one of the top reasons homeowners applied for home equity loans and lines of credit last year, according to data from LendingTree.
Credit unions that find ways to proactively educate homeowners about the benefits of leveraging their home equity can deepen engagement and identify opportunities to address their other financial needs. For instance, a homeowner may want to retire early and needs to find ways to aggressively build up their retirement savings. Perhaps a home equity loan could allow this member to invest and fund an early retirement.
According to the National Association of Realtors, homeowners who purchased a single-family home 10 years ago have gained an average of $225,000 in home equity. With interest rates continuing to rise after years of historically low rates, today’s homeowners will want help managing this asset.
The home equity space presents a clear opportunity for credit unions to foster lasting relationships with homeowners by guiding them to make the smartest financial decisions possible. To make the most of this window of opportunity, credit unions should re-think how they target and engage members about using their home’s equity.
After all, supply chain issues, inflation, additional interest rate hikes, an uncertain labor market and more influence housing prices—and, ultimately, home equity. To capitalize on the current home equity boom before conditions change, credit unions should focus their efforts and target the right members with the right offers. Given today’s competitive landscape, sticking with the status quo is no longer enough to drive loan growth for home equity products.
Matthew Covi is co-founder and CEO of Chimney, a financial platform that helpscredit unions fund more loans and increase engagement across web and digital banking.
