Renewing Home Equity Lending

By Annetta Cortez

Home equity lending has been a mainstay of retail banking, delivering superior levels of growth and profitability while providing a solid anchor for customer relationships. The market has radically changed following the wrenching U.S. recession, however, and banks will need new strategies and skills to make their way over the next few years.

At a time when the annualized pace of home equity loan origination is down roughly 70% from the 2005 peak, it is clear that lenders will be competing fiercely over a shrunken pool of borrowers who: 1) still can qualify for this type of credit, given all the issues with jobs, housing values and household indebtedness; and 2) still have an appetite for borrowing, given the fragile confidence in the economy and in banks themselves.

In many cases, the front line of this battle will be found in the branch, where live representatives are generating up to three-fourths of all new home equity credit at some major regional banks. As opposed to frenetic order-taking at the top of the market, reps now must play a prominent consultative role, not only to more thoroughly prepare and evaluate applications, but also to shore up borrower confidence.

Behind the scenes, banks will need to be much more deliberate about how they acquire and underwrite new business. This includes high sensitivity to local market housing conditions, as well as to the financial solidity of each household applicant. Then within this narrowed bandwidth of feasible lending potential, improved risk-adjusted pricing will be needed to protect the portfolio and provide adequate shareholder returns.

The good news is that there still is an important role for this business. Home equity lending provides a valuable form of consumer credit. It allows households to borrow on attractive terms, for purposes such as home improvement, education financing, and debt consolidation. And this type of borrowing facility is becoming even more important these days as many other sources of credit financing are drying up.

To win share in a sharply constricted market, however, retail banks will have to move beyond the product-push strategies of recent years. The new competitive dynamic hinges on a much more analytical understanding of markets and customers, coupled with a much more consultative and personalized interaction with each borrower.

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