FirstClose Blog

The battle among lenders for home equity turf is on as many step up their game in a competitive market that is demanding more efficiencies, a better customer experience and improved risk management. While traditional strategies and strong customer relationships still matter, increasingly it’s the digital experience, powered by new technology, that’s separating the winners from the “wannabes.”

The equity wealth that Americans have amassed has been well documented—to the tune of about $35 trillion in total home equity. That’s an almost 80% increase since early 2020. According to ICE Mortgage Technology, at the beginning of this year, the average homeowner with a mortgage had approximately $313,000 in equity, with about $203,000 of that being tappable.

With mortgage rates staying 6%-7% range in the foreseeable future, tapping home equity has become an attractive option for borrowers seeking access to funds without refinancing their primary mortgage—particularly for the millions who are “locked in” with low rates. According to First American Chief Economist Mark Fleming, nearly 90% of homeowners with a mortgage have rates below 6%. Home Equity Lines of Credit (HELOCs) and Home Equity Loans (HELs) are projected to experience notable growth in 2025. Curinos, a data and technology provider to the financial industry, forecasts a 15% to 20% year-over-year increase in home equity originations this year.

That represents a significant market opportunity for home equity lenders including both financial institutions (FIs)—which include banks and credit unions that have traditionally dominated home equity lending—as well as independent mortgage banks (IMBs) and new-to-market fintechs. As lenders compete to capture home equity volume, it’s clear that doing things the traditional way won’t cut it. Not only is competition more intense, but expectations from borrowers are changing, both in terms of turn time and having a frictionless, quick and streamlined experience, from application to close. Innovative solutions that leverage technology are required to get ahead of the competition.

Fierce Competition for Low-Margin Products

A recent HousingWire research study, sponsored by FirstClose, offered revealing trends and expectations among lenders in the home equity space, including their technology plans. Of the $360 billion in home equity outstandings tracked by the U.S. Federal Reserve, the vast majority is held by FIs with approximately $250 billion held by banks and another $140 billion by credit unions. The emerging secondary market for home equity products, however, is helping fuel home equity lending among IMBs and fintechs, many of which are highly optimistic. According to the HousingWire study, 41% of IMBs surveyed expect the home equity lending market to continue to grow while only 7% of Fis surveyed expect continued growth.

There’s been increased activity in the home equity secondary market with significant closed-end second (CES) deals announced over the last couple of years and both Freddie Mac and Fannie Mae announcing they will buy CESs. These developments have paved the way for IMBs and fintechs to go all in on home equity. Still, challenges exist for all home equity lenders.

In the HousingWire study, both FIs and IMBs identified similar key challenges including budget constraints, liquidity, operational efficiency, internal training and borrower education, all of which modern technology and automation are helping to address. For instance, FirstClose’s advanced digital home equity solution enables lenders to automate property valuations, credit reports and title searches which expedites the loan decision process, reduces errors and enhances the experience for borrowers. Specifically, lenders are focused on several key challenges:

• Speed to Market: Traditional lending processes are often slow and cumbersome which won’t satisfy borrowers who have come to expect immediacy—even for big-ticket purchases and financial decisions. Delayed loan decisions and manual underwriting can frustrate borrowers and reduce conversion rates. Digital solutions, such as what FirstClose offers, allows borrowers to close home equity loans in 7-to-10 business days vs the industry average of 45-to-60 days.
• Risk Management: Given the low-margin characteristic of home equity products and the need to move quickly, risk management is even more important in home equity lending. Accurately assessing home value and borrower creditworthiness is critical to maintaining loan quality.
• Liquidity Management: Managing balance sheet exposure and securing secondary market takeout options are necessary for sustainable growth in the home equity space. Maintaining access to capital is essential, but lenders need solutions to open these doors. The FirstClose Liquidity Network connects lenders to capital markets and takeout options, helping them manage liquidity and reduce portfolio risk.

Leveraging Technology for Competitive Advantage

In many cases, IMBs are coming to market with built-in tech-enabled solutions and sleek, automated customer engagement that is exactly what borrowers are looking for. However, they’re competing with the deeper pockets that many FIs have which allow for increased technology and expanded digital solutions.

Leveraging technology to enhance efficiency and drive growth in home equity lending is vital, but are lenders really using and/or planning to implement it? According to the HousingWire study, 52% of FIs plan to implement new technologies or automation to improve home equity operations compared with only 37% of IMBs. Perhaps the lower percent of IMBs is an indication their technology is already more advanced than FIs so their need for new upgrades isn’t as great.

To win in home equity, lenders must be agile, efficient and customer-focused. By leveraging modern technology and innovative digital solutions lenders can accelerate loan decisions, reduce risk and maintain access to capital, all of which will ensure long-term success in the home equity space.