Black Knight reported in its October 2019 Mortgage Monitor that “tappable” equity – the amount of available equity before reaching an 80% combined loan to value ratio – is near an all-time high at $6.3 trillion. According to Black Knight, 45 million homeowners have an average of $119,000 in tappable equity available to borrow against.
What’s more, 65% of borrowers with tappable equity had current interest rates at or above the going rate as of mid-November (3.75%), meaning they could potentially tap into home equity via a cash-out refinance at a similar or even better rate than what they have today.
When combining this potential market with today’s dynamics, the conditions appear to be ripe for increased equity-driven transactions. Tight housing inventory and high home prices have made many consumers more inclined to stay in their current residences and renovate, instead of purchasing new properties.
In an environment where fierce competition for new business, reduced origination productivity and significant margin compression are prevalent, an expanding pool of potential borrowers is certainly good news for lenders.
However, equity-driven transactions present their share of challenges – namely, thin margins, lower conversion rates and lackluster retention rates. In fact, just one in five borrowers taking equity out via refinance is retained by their lender/servicer on the other end of that transaction.
While several dynamics are likely responsible, one contributing factor could simply be the complexity involved in applying for and getting a refinance or other home equity product. Homeowners can certainly borrow money other ways – and indeed many do, opting for unsecured personal loans that are faster and simpler to obtain, for example.
For lenders to successfully respond to this dynamic and tap into this market, first they need to automate and digitize the end-to-end lending process as much as possible. A digital point-of-sale solution is critical to deliver accelerated prequalification and application processes. And, of course, a comprehensive loan origination system is necessary to standardize and automate back-end workflow. Ideally, the two would be seamlessly integrated, appearing as one system to lenders and their customers.
But, to improve pull-through and retention rates, it’s essential for lenders to also leverage a solution that supports digital closings – one that delivers the most efficiencies by adapting to the particular complexities and variations in the home equity closing process.
We’ll have more about how lenders can improve their success in this market, and how Black Knight is prepared to help, in Part II of this series.