Emerging Opportunities in Home Equity Lending. Joe Mellman Senior Vice President, Mortgage Business Lead

Transcription

1 Emerging Opportunities in Home Equity Lending Joe Mellman Senior Vice President, Mortgage Business Lead

2 In this session, we ll address: What is the current state of the home equity lending market? Why is personalized marketing important? How can lenders address home equity usage when reaching consumers prior to their origination? How can lenders use personalized marketing to create customized offers? 2018 TransUnion LLC All Rights Reserved 2

3 Home equity originations will refer to the following three loan types throughout this presentation HELOC: Revolving line of credit extended to a homeowner, where the borrower s home is used as collateral HELoan: Installment loan extended to a homeowner, where the borrower s home is already used as collateral for another loan Cash-out refinance: New first mortgage that is larger than, and replaces an existing mortgage 2018 TransUnion LLC All Rights Reserved 3

4 v What is the current state of the home equity market?

5 House price index While home prices have surpassed 2005 boom levels, household home equity has grown even faster House price index vs. household home equity index (2000 Q1 = 100) $13.2T $14.4T Forecast Household home equity index 100 = $6.2T Source: Historical and forecasted HPI from S&P CoreLogic Case-Shiller; Household home equity from Oxford Economics 2018 TransUnion LLC All Rights Reserved 5

6 Home equity originations (M) Home equity originations have been rising Home equity origination counts by product type Total home equity originations HELOCs HELoans Cash-out refis Source: TransUnion consumer credit database 2018 TransUnion LLC All Rights Reserved 6

7 Average home equity origination amount ($K) Average home equity origination amounts have also steadily increased Average home equity origination amount by product type Total home equity originations HELOCs HELoans Cash-out refis Source: TransUnion consumer credit database 2018 TransUnion LLC All Rights Reserved 7

8 There are ample signs the home equity lending market is poised for additional growth Trends Evidence With rising interest rates and home prices outpacing wages, homeowners are increasingly likely to stay in current homes and are motivated to renovate Consumer debt is increasing, making debt consolidation more attractive $14.4 trillion in home equity ~70 million homeowners likely qualify for a home equity product The recession caused a home equity lending pull-back, effectively eliminating consumer marketing and education that is changing, and consumer awareness and behavior will likely follow ~800K HELOC borrowers are nearing end-of-draw in the next 12 months Source: TransUnion consumer credit database and analysis 2018 TransUnion LLC All Rights Reserved 8

9 v In the Consumer First Era, understanding your customers needs is more important than ever

10 Consumers already have many offers to choose from How will you make your offer stand out? 2018 TransUnion LLC All Rights Reserved 10

11 Personalizing your offer can have a big impact Adding more personalized information can increase response rates by up to 500% 1 Over 84% of U.S. consumers reported that personalization made them more likely to open a direct mail piece 2 63% of respondents from a worldwide survey said they were annoyed by the way brands continue to rely on blasting generic advertising messages repeatedly 3 Sources: TransUnion LLC All Rights Reserved 11

12 To create the right home equity offers, start by understanding how borrowers use the product Usage Undrawn Description HELOC that is not used immediately (e.g., rainy day fund ) Piggyback Concurrent with a mortgage origination, often used for down payment Debt Consolidation Consolidate balances from other credit products Refinance Refinance to get a better rate or term Major Expenses Take cash out, often for a large expense, but potentially also for investments or rainy day fund 2018 TransUnion LLC All Rights Reserved 12

13 Consumers clearly use home equity products for multiple purposes Usage of home equity originations, July 2016 June % 2.4M originations 41% 23% Major Expense, Debt Consolidation, and Refinance make up the bulk and will be our focus going forward 4% 2% Major Expenses Debt Consolidation Refinance Piggyback Undrawn Segments are not mutually exclusive Source: TransUnion consumer credit database 2018 TransUnion LLC All Rights Reserved 13

14 And while complex, some patterns emerge Usage of all 2.4 million home equity originations, July 2016 June 2017 Major Expenses 40% Major Expenses is the largest single bucket, most of which is coupled with other uses Debt Consolidation is largely coupled with one or more other uses 29% 9% 12% Refinance is primarily coupled with Major Expenses or all three uses Debt Consolidation 2% 1% 1% Refinance Usage is rarely solely for Debt Consolidation, Refinance, or both Note: excludes Piggyback and Undrawn usages Source: TransUnion consumer credit database 2018 TransUnion LLC All Rights Reserved 14

15 v How can you address home equity usage when reaching consumers prior to their origination?

16 Approaches exist to address consumers multiple usage Messaging strategy Contact once Frequency Contact multiple times Consistent primary and secondary message Changing different message in every mailer Optimal approach is a moving target and requires continual testing 2018 TransUnion LLC All Rights Reserved 16

17 We built models to proactively predict home equity usage prior to origination t - 3 t t + 6 Observation period for consumer credit characteristics Quarter prior to origination Credit score (VantageScore 3.0) Mortgage and home equity loans Credit card loans Auto loans Student loans Personal loans Home equity originations (t) between July 2016 June 2017 Observation period to determine actual usage six months after origination Major Expenses Debt Consolidation Refinance 2018 TransUnion LLC All Rights Reserved 17

18 Certain credit factors were predictive of usage EXAMPLE Credit profile factors End-of-draw Description Borrowers tended to refinance around the HELOC end-of-draw date Loan types Borrowers with certain types of loans were more likely to borrow against home equity Loan balances Loan amounts above a threshold were strong indicators of Refinance and Debt Consolidation Source: TransUnion analytics 2018 TransUnion LLC All Rights Reserved 18

19 We used the following process to identify and test the effectiveness of a more personalized solicitation strategy Each home equity origination usage was predicted to be a combination of the three primary usages: Major Expenses (ME), Refinance (R) and Debt Consolidation (DC) We translated the predicted usage into a solicitation strategy We assumed a dual messaging approach would be used Since the vast majority of our target population uses equity for ME, we assumed every message would have at least an ME component We consider our solicitation strategy successful if we did not offer an incorrect reason for why the consumer would apply for credit If the consumer had only one usage of their home equity product, we considered the solicitation strategy effective if the actual usage matched at least one of the solicitation points (the other is considered extra, but not wrong) If the consumer had two usages of their home equity product, we considered the solicitation strategy effective if both usages matched the solicitation strategy In the case of three consumer usages, we considered our solicitation strategy effective every time, since every reason we offered was a legitimate consumer need Source: TransUnion analytics 2018 TransUnion LLC All Rights Reserved 19

20 Solicitation strategy This approach correctly identified usage for ~90% of originations Actual usage Numbers in thousands DC and ME R and ME ME only 358.2K (36.4%) 61.6K (6.3%) DC only 19.6K (2.0%) 1.8K (0.2%) R only 2.1K (0.2%) 9.7K (1.0%) ME & DC ME & R DC & R All 3 Total 203.5K (20.7%) 24.9K (2.5%) 50.5K (5.1%) 132.7K (13.5%) 3.5K (0.4%) 7.1K (0.7%) 31.2K (3.2%) 77.8K (7.9%) 668.6K (67.9%) 315.6K (32.1%) Successful solicitation Unsuccessful solicitation Total 419.8K (43%) 21.4K (2%) 11.8K (1%) 228.4K (23%) 183.2K (19%) 10.6K (1%) 109.0K (11%) 984.2K (100%) ME = Major Expenses, DC = Debt Consolidation, R = Refinance Note: % are as of Actual usage Source: TransUnion consumer credit database 2018 TransUnion LLC All Rights Reserved 20

21 v What additional information can be used to personalize your offers?

22 Consumer specific attributes can be used to tailor offer messages to each consumer Usage Debt Consolidation Example attributes Size of non-mortgage debt that could be consolidated Revolving versus transactional behavior Monthly cost savings APR reduction Refinance Major Expenses Presence of an existing home equity product Type of existing home equity product Amount of debt that could be refinanced Monthly cost savings APR reduction If there is an existing HELOC, what is its: End-of-draw date End-of-draw payment spike No specific attributes generalized messaging 2018 TransUnion LLC All Rights Reserved 22

23 Tailored messages are much more persuasive Illustrative debt consolidation messaging Generic message Tailored message 2018 TransUnion LLC All Rights Reserved 23

24 v How does this all fit together?

25 We recommend a 5-step approach Step 1: Identify homeowners within your footprint who have equity in their homes Step 2: Use a propensity model to identify homeowners likely to be in market for a home equity lending product Step 3: Apply predictive models to determine likely home equity usage Step 4: Leverage tailored attributes to build your use-specific messaging Step 5: Incorporate a continual test and learn approach with each contact solicitation (e.g., single message, dual message, mail frequency, etc.) to continually improve approach 2018 TransUnion LLC All Rights Reserved 25

26 Example: leveraging predicted usage and credit attributes to create tailored messaging Refinance into a Low-rate Home Equity Line of Credit Dear Mr. Smith, 1.99% APR For the first six months You are eligible for a Home Equity Line of Credit from ABC Lending with a low introductory APR of 1.99%. You can use it to refinance your $51,000 HELOC approaching End-of-Draw in 2019 and avoid a payment spike of up to $300. Great news! You can also get up to $45,000 to cover other major expenses for an additional $308 per month. Primary message: Refinance existing HELOC based on end-of-draw date, HELOC balance and expected HELOC payment increase Secondary message: Major Expense 2018 TransUnion LLC All Rights Reserved 26

27 In summary: Home equity origination volume is still lagging behind household home equity growth Additional market forces are creating a market ripe for home equity origination growth Making consumers the right offer is critical in today s competitive lending environment Credit can be used to predict home equity usage, as well as provide consumer-specific offer details This information can be combined with existing propensity models to drive marketing strategy 2018 TransUnion LLC All Rights Reserved 27