Is Fintech a Threat to Home Equity Business As We Know It?

Mortgage Brokers Need To Determine If Legacy Products Can Compete

By KEN FLAHERTY, SPECIAL TO MORTGAGE BANKER MAGAZINE

Relationships are more like journeys than they are destinations. In romance and in business alike, staying connected and continuing the exchange of resources is an obvious choice when the needs of all parties are fulfilled. However, much like the relationship between traditional home equity lenders and borrowers, when one grows complacent as the other evolves, challenges arise, making other options appear more attractive.

As the home equity boom continues, bringing the total average equity per borrower to $300,000 with a 25% growth in tappable equity year over year, more homeowners are choosing to tap into their home’s value as a low-cost way to borrow large sums of money.

While gravitating toward home equity products makes sense in the recent rate environment, doing so could come with an unnerving feeling of delayed gratification. Against the backdrop of today’s fast-paced lending market, the traditional home equity process can seem lengthy, demanding, and complicated.

There is a seismic shift in borrower behavior that is priming this market for disruption. It was once assumed that banks would continue dominating the home equity space due to their longstanding relationships with customers; but this certainty has given way to inertia, allowing new fintech organizations with better marketing, sleeker interfaces, fully digital capabilities, faster processing speeds, and differentiated product options to enter the scene.

The current landscape now demands traditional financial institutions to determine if their legacy products and services can endure the growing appeal of fintech and digital lenders.

WHEREVER THERE’S CHANGE,

THERE’S OPPORTUNITY Tappable homeowner equity hit record highs in 2022 with a $2.3 trillion increase that brings the total value to $11.5 trillion.

After a period of being out of favor among lenders, it is possible that a generational unfamiliarity with home equity could make it challenging for a rapidly growing demographic of first-time homeowners and young finance professionals to have the succinct discussions needed to identify a customer’s needs and make the right recommendations. In the event of a large purchase or sudden need for financing, customers who have never used home equity may be inclined to prioritize speed and choose an unsecured loan, the quickest and easiest option, where a home equity product would be the better long-term solution.

Unsecured lending is a big space for fintech organizations. They have perfected the process and are outpacing traditional lenders, with some up 141.3% year over year Borrowers sitting on low first mortgage rates and excessive equity will undoubtedly turn to unsecured loans or home equity products for their financing needs. The problem remains that tapping into home equity is still a very long and painful ordeal, and this plays right into the hands of fintech lenders.

On average, it takes traditional financial institutions 50 to 60 days to close home equity loans, which means customers could wait up to a few months to get approved and receive funds. Fintech is entering the space with a competitive strategy of speed and convenience. Boasting 5-minute loan approval times and dispersing funds in as little as 5 days, digital lenders have all the necessary ingredients to create a ripple in the industry because of how fast they can get their product into consumers’ hands.

Seeking Simplicity

Today’s consumer is accustomed to streamlined processes and same-day deliveries across industries. Technological advancements that support ease and speed are shifting the consumer mindset, creating a greater need to stay in touch with what they think and how they behave. Borrowers increasingly expect simplicity in applying for a loan, immediacy in loan decisions, and seamless delivery of funds.

Fintech organizations also offer alternative solutions to outdated home equity products. The rapid increase in mortgage rates over the past year has opened up a variety of new financing opportunities. Some are similar to a traditional home equity line of credit and others start from scratch, rethinking the product entirely.

For example, fintech lenders have recently introduced equity-sharing programs as an alternative to conventional home equity lending. While foregoing traditional loan approval processes and repayment terms, homeowners can sell portions of equity in their home, sharing the value increase of a property, whereas traditional financial institutions have heavily regulated systems in place that make it challenging to offer alternative products.

Even if banks are not interested in investing in equity, it is worth acknowledging that there are other customers whose usage patterns have shifted beyond the classic equity loan format. In recent years, borrowers’ needs have become more shortterm. The odds are a borrower may not need a 30-year product. A 2-year product is more appropriate today as borrowers’ peak usage rates are apparent well before the loan ages even 12 months. And, while old products may work, they do not meet borrowers’ short and long-term needs.

Flexible Solutions

The beauty of fintech organizations is their focus on innovating around one use case. They are not full-service financial institutions but often perform significantly better in the spaces they occupy. Digital lenders offering flexible solutions make it vital for traditional lenders to better understand and align themselves with consumers.

Banks have historically been slow to adopt new home equity products and technology. Market changes offer the perfect environment to embrace innovation and invest in technological advancements that create a more customer-centric, streamlined approach to their origination.

Digital lending companies are entering and disrupting a very mature market by simply meeting customers where they are. Now is the time to leverage data to measure what is happening and reassess the product instead of applying a one-size-fits-all approach. Traditional home equity lenders won’t be closing their doors and going out of business tomorrow, but if forced to choose, it should come as no surprise that borrowers are willing to roll the dice on the new guy in town.