North America Consumer Home Equity Loan Survey

Unlocking home equity lending through a digitally empowered consumer

Signs of a rebound continue to show in the North American home equity lending market. Originations are on the rise, as are home values and consumer optimism. Traditional lenders are becoming more digital as newcomers fuel the competitive pressure. To gain insight on how borrowers are impacted by and influencing market changes, Accenture polled more than 6,000 consumers in the United States and Canada about their home equity loan buying behaviors, preferences and experiences.

This report highlights the findings from the Accenture North America Consumer Home Equity Loan Survey, and suggests ways that lenders can more profitably grow their business.

Executive summary 1A resurgent market for home equity lending 2Market conditions attract novel competitors 2 There’s room for improvement 4Particularly, new digital capabilities are key 5Conclusion: Capture the growth potential 7

Executive summary

The market for home equity lending continues to rebound steadily due to a more favorable economic climate. Originations for home equity loan products increased nearly 15 percent or more since last year, with the number of new credit lines at the highest level since the most recent credit crisis in 2008, according to Equifax.1 As such, lenders’ first priority should be to capture more customers through an enhanced borrower experience, doing so particularly by investing in digital capabilities throughout the loan process. The outcome for those lenders making the investment include higher market share, better financial results and process efficiencies over time by meeting increasing customer expectations—especially those of an emerging niche of younger, digitally-savvy borrowers.

Digital-powered mortgage banking processes will be critical for home equity lenders to be more profitable going forward. A key finding from Accenture’s new research on consumer home equity lending in North America confirms this

premise: 93 percent of respondents who have used a digital capability during the loan process are highly satisfied. The survey of more than 6,000 consumers in the United States and Canada, conducted in late 2015, also indicates that:

Customers are not always aware of the main financial options available, despite the extensive market research they conduct or the frequency of contact they have with their lenders—a fact that underscores the growth potential for home equity products as the industry makes the user experience and education easier than ever.

Borrowers are active users of mortgage services research. Nearly all respondents from the United States (94 percent) research home equity loan options online, with 52 percent overall conducting “a great deal” of research. Home equity loan shoppers who rely on digital channels to do their research gravitate mostly to online lending sites, possibly providing a competitive opening for emerging marketplace lenders to create a user friendly and exquisite digital experience for these potential borrowers.

Borrowers want the loan process to be streamlined, more affordable, transparent and as secure as possible; however, gaps exist between the capabilities they most value during the lending process and their satisfaction with those capabilities.

All of the largest Canadian banks (and only a handful of United States lenders) are considered higher performers when it comes to the speed of loan approvals and closings. However, Canadians, overall, are less satisfied with their experience.

Consumers view the largest lenders in the United States as having a competitive advantage in offering digital capabilities across the lending cycle, but lag behind in speed of loan approval and closings.

If pricing was not a factor, borrowers would most value having a single point of contact during the loan process which makes their experience more user friendly, followed by the lender paying/managing fees and handling loans on a proactive basis.

1

A resurgent market for home equity lending A number of signals are pointing to a resurgent market for home equity lending, especially in the United States. Americans are tapping into the steadily growing equity of their homes at a rate not seen since the credit crisis nearly a decade ago.

Origination levels for both home equity lines of credit (HELOCs) and home equity loans (HELOANs) are on the rise. The number of new HELOCs is up nearly 15 percent year-over-year, the highest level since 2008; their total dollar limit is up 24 percent year-over-year, the highest level

seen in seven years.2 Similarly, the number of HELOANs originated over the past 12 months increased 23 percent; their total loan amount exceeds US$12 billion, nearly a 20 percent increase year-over-year.3 A key driver of growth in lending demand is the continued rise in home valuations. Black Knight Financial Services’ Mortgage Monitor reports that as of August 2015, Americans had approximately US$7.6 trillion in equity in their homes—a 12.2 percent increase year-over-year—where an estimated $4.5 trillion (59 percent) can potentially be accessed by borrowers.4

Accenture survey respondents who anticipate applying for a home equity loan in the next two years are more inclined

to do so for positive reasons (Figure 1), signaling an improved view of economic prospects. Millennials, for example, cited rising home prices and valuations as the top reasons they expect to apply for a home equity loan within the next 24 months. They are also expecting to purchase durables, like a washing machine or dishwasher, with their approved loan. The survey indicates that on average in North America and the United States, borrowers plan to take a 92 percent draw of available funds from the loan at closing; this level of access is a bit less (80 percent) for borrowers over 54 years old. Just over two in five people plan to access half or more of a loan’s funds within the first six months of the loan closing.

Figure 1. Why consumers apply for a home equity loan

2

Market conditions attract new competitorsThanks to renewed market growth, traditional lenders are seeing more competition as evident in the steady loss of market share by the three largest lenders in the United States. Their collective share of more than 55 percent in 2010 dropped to just under 44 percent in 2015, according to US government data as shown in (Figure 2). Through the first nine months of 2015, the “big three” lenders in the United States posted a nine percent decline in home equity loans outstanding year-over-year and a three percent decline in fallback for the latest quarter reported. Alternative lenders as well as regional banks and credit unions have seen an increase in market share.

The types of home equity lenders have increased since before the credit crisis. The strong emergence of non-bank lenders is being led by mono-line, digitally focused lenders, such as Quicken and Loan Depot, and retailers with bank-originated, white-label offerings. For example, Costco teamed with First Choice Loan Services to provide mortgage services. 5 Home Depot offers a “Project Loan” program for home remodeling.6

Still, the biggest threat could come from alternative lenders like fintech startup Social Finance (SoFi). Such emerging, free-from-tight-regulation lenders have more flexibility to offer innovative lending products to highly segmented markets, build proprietary credit reporting repositories and attract investment dollars to affect other competitive advantages over banks. Based on Accenture Research

analysis of CrunchBase data, five of the most prominent alternative lenders based in the United States (including SoFi) together have received more than US$3.6 billion in venture capital funding.7 Younger borrowers—including students (41 percent) and those between the ages of 18 and 24 (24 percent)—are more willing in the future to apply for a loan with a non-bank lender, per the Accenture survey.

Another potential competitive factor for alternative and online lenders is consumers’ increasing tendency to do their own research on home equity lending, according to the Accenture survey. More than 90 percent of respondents conduct some level of research with 48 percent doing “a great deal” of research. Regarding customers’ researching efforts, significant market differences exist between the United States (52 percent) and Canada (31 percent),

n = all 6,201 survey respondents

3

Figure 2. Market share of the three largest home equity lenders in the United States

Source: FDIC.gov and Accenture Research, December 2015

between city dwellers (57 percent) and rural residents (37 percent) and between borrowers aged 24 or younger (57 percent) and Baby Boomers (24 percent). Banks are still the prominent source of home equity and mortgage banking information for customers who have applied for a home equity loan. Yet, when it comes to using digital channels to conduct research, North American customers are most reliant on online lending sites, aggregators and peer-to-peer providers. Traditional bank lenders,

as shown in (Figure 3), rank last. Among customers who go online looking for home equity loan information are those living in urban and suburban areas, those older than Millennials and wealthier borrowers. The survey found that customers were more likely to be satisfied if they took advantage of online financial literacy and rate shopping resources.

The intensely competitive environment is being fueled by lender investments in

digital, social media, marketing (including search engine optimization) and the sophistication of mortgage services shoppers to use consumer electronics. Home equity borrowers are largely users of consumer electronics, despite their preference to visit a branch to apply for a loan; there is little variance even when comparing the youngest and oldest groups of borrowers (Figure 4).

Figure 4. Consumer electronics use of home equity borrowers

n = 4,999 survey respondents

Figure 3. Percent of customers who use digital channels to do research on the home equity market

n = 5,725 survey respondents

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There’s room for improvementThe good news for home equity bank lenders is that, for now, borrowers in North America are satisfied overall. According to the survey:

Lenders are working diligently on behalf of borrowers to earn these scores, most notably during the application process. Respondents indicated a number of the largest Canadian banks as higher performers when it comes to the time it takes to approve and close loans (Figure 5).

Also, nearly three-quarters of borrowers in the United States hear from their lender more than once per week during the application process (Figure 6).

94 percent applied for their home equity loan at a bank, with more than two-thirds

(68 percent) doing so at their primary relationship bank (76 percent in Canada).

94 %

90 percent said they would probably refer their lender to friends and family; nearly half

said they definitely would. Consistent with satisfaction levels, Canadian consumers are less willing to recommend their lender to others based on their experience. Younger borrowers are also less willing to refer others to their lender.

90 %

76 percent indicated that their home equity loan experience exceeded that of

other types of lending situations they encountered in the past.

76 %

Figure 6. Frequency of lenders’ weekly contact with borrowers during application process

n = 4,612 survey respondents

Figure 5. Lender average number of business days to approve a loan

n = 4,612 survey respondents who were approved for a Home Equity Loan

79 percent (85 percent in Canada) want a second lien with a bank, particularly

with their primary bank.

79 %

5

Despite the high level of borrower satisfaction, banks that are looking to expand the size of their book can do more to increase customer awareness of the various features of their loan program. For example, among borrowers in North America:

Particularly, new digital capabilities are keyBanks also have work to do in the customer experience area. Survey results show that lenders in North American face customer satisfaction gaps in the lender attributes that borrowers value the most. The same demographic groups that most value their

lender as “cost effective and affordable” and makes “it easy to understand loan terms”—the top two rated attributes of lenders—are least satisfied with lenders’ performance in these areas. For example, 78 percent of borrowers 55 years or older value most highly that their loan be “cost effective and affordable” compared with 43 percent of borrowers aged 18 to 24. Younger customers place greatest value on their lender communicating understandable loan terms, followed very closely by it “being accurate in managing my financial data.”

Going forward, lenders will do well to focus on achieving cost efficiencies and investing in digital capabilities throughout the loan process. Today most home equity loan applications are completed in the branch, particularly in Canada. In the United States, 34 percent of borrowers have completed an application digitally. As shown in (Figure 7),

Only 41 percent know they can use home equity loans to refinance debt or that

they can access loan information via online or mobile channels.

41 %

Only 21 percent know they can access funds from the loan via a credit card.

21 %28 percent are surprised at having to pay closing costs; most surprised are borrowers

over age 55 (56 percent), and those living in Canada (45 percent) and in rural areas (38 percent).

28 %

Figure 7. Percent of customers in the United States using digital capabilities within the home equity loan process

Nearly 60 percent do not know they can access the home equity loan process using their

cell phones or the Internet; surprisingly, that number rises slightly to 66 percent for high-income customers.

60 %

n = 3,715 survey respondents

6

just over a fifth of borrowers in the United States who applied for a home equity loan have used some type of digital application at some point in the loan process. Nearly all respondents (93 percent) who used a digital capability during the home equity loan process are highly satisfied.

The survey, which tracks customer feedback on individual loan institutions, indicates that the largest lenders in the United States and Canadian markets have a slight competitive edge when it comes to their digital capabilities.

Operating more digitally will help a lender deliver to borrowers the loan experience they want. Assuming pricing is not a factor, borrowers would most value the following lender capabilities (Figure 8):

1. Receiving end-to-end customer service, ranked highest by those living in urban areas (54 percent) compared to rural customers (43 percent).

2. To pay and manage related fees and loans on a proactive basis, ranked highest by 18- to 24-year-olds, urban and low-income consumers. Alternative lenders, in particular, are focused on providing their services and information on a proactive basis.

3. Being able to execute transaction mostly through digital channels, ranked highest by those aged 25 to 34, urbanites, lower-income consumers, and those who have applied (and been accepted) versus those who plan to apply.

Figure 8. Lender capabilities borrowers would most value, assuming pricing is not a factor

n = all 6,201 survey respondents

Conclusion: Capture the growth potentialNorth America’s top home equity lenders have a two-fold opportunity to protect their turf: scale to higher profitable efficiencies while expanding sustainable growth. To do so, they should focus on taking the seven key actions shown in (Figure 9).

Additionally, gaining the capabilities to take full advantage of cross-sell opportunities is critical to getting more high-quality customers into the sales funnel. Accenture research shows that consumers are more willing to go to their primary bank relationship for a home equity loan than most other financial products and services (Figure 10).8

By using digital to tightly connect all aspects of their loan process, lenders can adapt more quickly and reposition their business to fully capture the potential of the home equity loan market in persuasive and sustainable ways.

7

Figure 10. Percent of North American consumers who received certain banking loans with their primary bank over the past 12 months

n = 4,004

Figure 9. Key actions lenders should take in managing their home equity business

ContactTerry Moore Senior Managing Director terry.l.moore@accenture.com David W. HelinThought Leadership Research Principal DirectorAccenture Researchdavid.w.helin@accenture.com Kelly AdkissonManaging Directorkelly.m.adkisson@accenture.com Randy LightbodyManaging Directorrandall.e.lightbody@accenture.com

Survey Population and Methodology

• Accenture’s Home Equity Loan Survey was conducted between September 7th- 18th, using an on-line panel by a 3rd party provider: • Margin of error is 1.24% with a confidence level of 95% • 6,201 total responses in North America, of which 80% (4,948) was for the US and 1,253 for Canada • 4,999 total responses in North America for those who have applied for a HELOC in the past 2 years (82% in US vs. 18% in Canada) • 1,022 total responses in NA for those who would be interested for applying for a HELOC in next 24 months (889 in US and 313 in Canada)

About AccentureAccenture is a leading global professional services company, providing a broad range of services and solutions in strategy, consulting, digital, technology and operations. Combining unmatched experience and specialized skills across more than 40 industries and all business functions—underpinned by the world’s largest delivery network—Accenture works at the intersection of business and technology to help clients improve their performance and create sustainable value for their stakeholders. With more than 358,000 people serving clients in more than 120 countries, Accenture drives innovation to improve the way the world works and lives. Visit us at www.accenture.com.

Notes1, 2 and 3 Homeowners Cash In On Equity Boom, Hartford Courant, October 2, 2014, by Ken Harvey4 Black Knight Financial Services’ Mortgage Monitor, September 8, 2015 press release5 https://costcofinance.com/about-first-choice-loans/6 http://www.homedepot.com/c/Project_Loan7 CrunchBase, https://www.crunchbase.com/organization/social-finance#/entity8 Accenture North America Consumer Digital Banking Survey 2015 www.accenture.com/us-en/insight-consumer-banking-survey.aspx

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