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Lenders need better tech to help homeowners unlock $20 trillion in tappable equity

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Chief Lending Officer

There’s only so much lenders can do to combat heightened interest rates and elevated home prices driving the decline in originations. But there’s a silver lining under all those gloomy headlines: The jump in home values over the past several years has existing homeowners sitting on mountains of tappable equity. Lenders have a massive opportunity in front of them to help homeowners recognize, unlock, and utilize their home equity. The trick is knowing who to talk to.

As of Q2 2023, CoreLogic says the average U.S. homeowner has more than $287,900 in home equity. That’s more than triple the average home equity in 2010 ($87,000). It all adds up to nearly $20 trillion in tappable home equity in the U.S.

But as the soaring trajectory of home equity crashes into rising rates, that equity feels locked up for most homeowners. Homeowners are reluctant to move — FannieMae reports just 22% of consumers think it’s a good time to buy a home — all but eliminating the traditional path of “trading up.” And they laugh at the mention of a cash-out refi.

The Fed may be slowing rate hikes, but recent figures from Redfin show we have a long, long way to go: More than 90% of homeowners have mortgages below 6%; 82% are under 5%; 62% enjoy rates under 4%; and roughly 1 in 4 homeowners are paying less than 3% on their current mortgage.

Home equity originations surge as consumers look to unlock home equity
These market conditions don’t suddenly erase homeowners’ expectations, needs, and goals. Growing families need more space. Motivated homeowners want to update and upgrade home features. Then there’s all the other needs and wants for which a sizable chunk of home equity presents an appealing source of financial fuel: buying a car, consolidating debt, or taking other big financial steps.

That’s why we’re seeing savvy lenders shift their focus to helping homeowners unlock that value through HELOCs. In fact, 2022 was the strongest year for home equity originations since the financial crisis. After declining through 2019 and 2020, second mortgage originations turned around in 2021 and then took off: a 41% YOY jump in 2022 and a projected 24% YOY increase through 2023, according to TransUnion. That growth represents nearly 200% more originations in the last two years — from 1.9 million in 2021 to a forecasted 3.7M units by the end of 2023.

Despite massive growth, it’s worth repeating the key figures on the outstanding opportunity: U.S. homeowners hold an estimated half trillion dollars in existing HELOCs — with roughly $19 trillion remaining in untapped equity. Moreover, one in five homeowners say they plan to take out a home equity loan in the coming year — up from 8% a year ago.

As rates trend down, cash-out refinancing becomes more attractive
Despite the regional banking crisis of early 2023 and the relative easing of inflationary pressures, Fed rates continue to increase — and mortgage rates have remained fairly flat in the high 6’s and low 7’s. This adds a wrinkle to the home equity equation: As rates trend down which is forecasted to occur through 2024, cash-out refinances begin to look better than HELOCs for more homeowners.

This point is particularly salient given reports around concerning levels of high-interest debt — primarily credit cards. Credit card rates are trending up, and total balances are rising to levels where they can become an unclimbable mountain for consumers. A recent quarterly report from the Federal Reserve Bank of New York states credit card debt has exceeded $1 trillion, a series high and $45 billion increase from Q1 of 2023. Home equity is a powerful tool for consolidating debt to get monthly cash flow back into a healthy range.

Lenders are looking at massive opportunities in home equity lending over the next few years. They just need to focus on finding that opportunity and nurturing that demand.

This tipping point in the rate environment happens particularly early for debt consolidation. For example, while a cash-out refi may bump a homeowner from 3% to 5.5% on their mortgage, they’re using that cash to pay off much higher-interest debt: an 8% auto loan or a 20% credit card balance, for instance. This math means that a homeowner may be wise to take a higher-rate cash-out refi to ultimately achieve net-positive monthly savings and increase their monthly cash flow by consolidating debt.

Homeowners want education and guidance on how to tap home equity
More than half of homeowners say they don’t have a good understanding of home equity lending products. Some don’t even know these options exist.

Lenders need to be able to walk homeowners through their options and simplify the complexity of it all: weighing the customer’s current mortgage rate against available rates on HELOCs; explaining how different home equity lending products are better suited to different use cases (i.e., home improvement, debt consolidation, etc.); and ultimately showing the customer what a given lending product means in real terms (i.e., what monthly cash flow and total debt looks like today against what it will look like after a cash-out debt consolidation refi).

The opportunity is there, but lenders struggle to find it
All of this — enormous outstanding tappable equity, growth in home equity lending, changing conditions bringing cash-out refis back into the conversation — represents tremendous opportunity for LOs that’s driven by, rather limited by, the high-rate environment.

But it still leaves lenders with the fundamental challenge of figuring out who they should be talking to about these home equity lending options. Who are the consumers in your database that have sizeable home equity? And even more importantly, which customers have had significant increases in equity since you last worked or talked with them? Lets face it: Most homeowners don’t keep close tabs on their home equity, and the nature of compound interest makes off-the-cuff estimates extremely difficult.

AI and intelligent automation uncovering home equity lending opportunities
We’re seeing many of the most successful lenders use smarter technology to crack the code on this challenge. They’re turning to purpose-built platforms like Total Expert to get real-time visibility to customers’ tappable home equity — and AI-powered tools to help them put that insight into action.

For example, Total Expert’s equity alerts show lenders when a customer’s home equity crosses a set threshold.

Lenders can automatically build and update a queue of high-quality prospects. Intelligent automation lets LOs use those alerts to trigger Total Expert’s automated journeys — micro-campaigns that string together hyper-personalized, multi-channel messages to engage and nurture so the lender can make a warm, human connection when the time is right. Journeys enable lenders to position one or many product offerings, such as a cash-out refinance, HELOC, reverse mortgage, or even recommend moving their mortgage insurance where applicable.

Lenders are also using this real-time home equity data to enrich other customer interactions. During annual mortgage checkups or other regular communications, lenders can have meaningful, personalized conversations with customers about how they can leverage their available home equity to support their financial goals. And marketing teams can use this robust equity data to automatically segment their databases — initiating targeted campaigns that alert prospects to available equity and deliver hyper-relevant education on how home equity lending products can unlock that equity.

Lenders need to use smart tech to meet homeowners where they are
Too much of the buzz in the mortgage industry today suggests we have no choice but to accept a few down years. Like any market, changing conditions just change the mix of demand. Lenders are looking at massive opportunities in home equity lending over the next few years. They just need to focus on finding that opportunity and nurturing that demand.

The key here is using smart technology to take a truly customer-centric approach: With deeper equity insights and intelligent automation, lenders can provide genuinely useful information on available home equity to the customers who need it most.