STRATMOR Group’s April Insights Report suggests lenders looking to build stronger businesses in the future should consider originating home equity loans and lines of credit immediately, even if that means adding products that return lower revenues in the short term.

In his article, “Home Equity Lending: Opportunity, Necessity or Distraction,” Principal Tom Finnegan highlights the need for these products as a result of the unprecedented increases in rates which have left borrowers “frozen in place” with respect to their existing mortgages.

Meanwhile, homeowner equity is growing fast, with estimates putting the growth in tappable home equity at $3.4 trillion over the last three years.

Despite the opportunity, Finnegan says lenders have been slow to take advantage. Home equity lending grew by 53 percent between 2021 and 2022, but then fell off in the first quarter of this year, according to Curinos.

STRATMOR research conducted with ICE Mortgage Technology indicates mortgage bankers believe, at least on the surface, that serving this need may be important to their overall strategy of building repeat customer business. Yet many institutions have not decided to proceed with offering a home equity product or to develop the capability to do so, according to Finnegan.

Traditionally, independent mortgage bankers (IMBs) have not offered home equity loans or line products, as their origination revenue model is not well suited to line of credit lending in which financial institutions often offer loans with no closing costs and retain the loans in their asset portfolios.

While institutions may have reasons for not pursuing these products, Finnegan says the potential benefits outweigh them.

“Refocusing on strategies which move beyond a purely transactional approach to the business and into developing customer for life advisory strategies will pay dividends for both loan originators (LOs) and for owners in building franchise value,” he said. “And this is a great time to evaluate the go-forward business strategies which will be important in all rate environments.”

Finnegan suggests steps lenders can use to get into the home equity game and start building the relationships that will lead to future loan business when loan volumes recover.

“In this difficult period for profitability, it can be tough to stick with any strategy that focuses on a longer term, customer-relationship-based approach,” Finnegan said. “But those who can continue to carve out a business strategy based on providing sound advice to customers can use the current environment to build a customer base that will almost certainly lead to increased market share in the future.”