These are interesting times for HELOCs. Home prices have risen sharply. As a result, home-equity wealth has doubled during the last five years to $13 trillion according to CoreLogic. Home prices are expected to continue increasing in 2017. This coupled with growing originations have led to renewed interest in home equity portfolios from bankers seeking new profit centers.
However, because customers are paying off debt more aggressively and large vintages are coming up to end-of-draw, we are also seeing HELOC and HELoan portfolio run-off more intensely than in previous years. According to ICON Competitive Lending Analytics, home equity portfolio run-offs are already at 8.7 percent in the first three quarters of 2016. By comparison home equity portfolios have been running off at 7 to 9 percent for the last three years. There is also more competition in pricing. For example, the ICON Home Equity Price Index showed a 1.5 percent decrease in 1st Liens, and a 0.4 percent decline in 2nd Liens in the first three quarters of 2016.
How are lenders responding to the stiffer competition and the higher rate of run-offs in their HELOCs and HELoans portfolios?
According to a Nomis HELOC Executive Survey conducted in October 2016, some lenders are employing sophisticated strategies to attract new customers. For example, our survey found that lenders are employing more pricing dimensions to HELOCs and HELoans: 44 percent are using between 4 to 6 pricing dimensions, while 22 percent use 6 or more pricing dimensions. We also learned that a majority (89 percent) of executives surveyed regularly run promotions to attract new customers, with 28 percent employing sophisticated strategies like targeted offers and segmentation analysis.
However, the survey also identified missed opportunities to slow attrition and stimulate utilization. For example, a majority (55 percent) of executives surveyed said they did not have any formal programs in place to prevent attrition. Similarly, 39 percent of executives said they did have a formal strategy in place to stimulate utilization of approved lines. Alarmingly, the survey also found that 67 percent of lending executives do not currently have a mobile strategy for HELOCs or HEloans. This is a big missed-opportunity to engage with customers who are asking for mobile solutions and increasingly favoring mobile over other channels.
Banks have a ripe opportunity to unlock the growth and profitability potential of their home equity portfolio, by engaging with their borrowers throughout their lifecycle—from the moment they open a new line to their utilization phase to the end of their draw down periods.
New technologies like deep analytics and predictive modeling can build a deeper understanding of customer behaviors to help banks identify the signals that indicate which customers are likely to transfer balances or make purchases using their HELOC. The bank can then design promotions specifically targeting the needs of those customers. By using predictive segmentation and competitive insights within a pricing framework, banks can turn market data into actionable strategies for targeted retention offers.
Click here to view an infographic about HELOCs from Nomis.