Joey McDuffee of Blue Sage Solutions: Smart Lenders Are Seizing Growing Home Equity Opportunities

Joey McDuffee is Vice President of Sales and Marketing with Blue Sage Solutions, Englewood Cliffs, N.J. He has 25 year of experience in development, support and sales of mortgage origination technologies. He has worked with a variety of the largest banks and mortgage companies across the country, including Wells Fargo, Citicorp and JP Morgan Chase, designing and implementing mortgage origination technology solutions and assisting with transformational process re-engineering. Prior to leading sales at Blue Sage Solutions, Joey worked in the U.S. and abroad, as head of sales at Wipro Gallagher Solutions.

It doesn’t take a genius to know that mortgage lenders are in a far more challenging place than they were one year ago. Limited inventory, soaring rates and rising inflation have blunted the purchase power of Americans contemplating buying a home, and this picture doesn’t seem to be changing anytime soon.

Over the past couple of months, numerous lenders announced plans to scale back operations. As rates rose to their highest point in nearly 20 years, loan volumes plummeted to levels not seen since the late 1990s. Independent lenders without the same level of capital or product diversity that major banks have in their portfolios are finding competition particularly demanding in the current environment.

However, there are still opportunities to be found amid this difficult market. One of the best opportunities, in fact, are home equity loans, particularly HELOCs, and closed-end seconds as well—products for which borrower demand is still relatively strong. And this opportunity becomes even brighter with the right resources in place.

Relocate vs. Renovate

If you want a bigger or better home, your customers can either relocate or renovate. And with rates several points higher than they were six months ago, the choice for many borrowers is clear, especially for those who already love the place they call home. According to the U.S. Census Bureau, total spending on residential construction grew 12.5% between August of 2021 and August of this year, driven primarily by home improvement spending, which grew 37.2%.

Of course, like 30-year fixed interest rates, the rates for HELOCs, home equity loans, second mortgages and renovation loans are rising, too. Yet the rates for these products are still much lower than rates for personal loans and credit cards, which many people use for home improvement projects such as a kitchen renovation or building an in-law unit to take care of aging parents. And with home equity loans and renovation loans, borrowers can still hold on to their original mortgages hovering around rates at 3%.

In addition, while home prices have leveled off in recent months, most homeowners are still sitting on a significant amount of home equity that they can use for home renovations. Yes, there is a chance that home values could drop should the economy head further towards a recession, which adds some risk to home equity loans. Yet like today’s purchase loans, these products are underwritten with much more certainty and integrity than they were before the last recession.

Demand is Strong

When the mortgage market contracts, it can be easy to forget that there are millions of potential homebuyers and homeowners who still need financing to help meet their goals, whether it’s buying a home or renovating their current one. The growth in home equity loans, seconds, and renovation loans illustrate this point.

While purchase opportunities have dropped to a snail’s pace, home equity loans and lines of credit are still going strong. During the first five months of the year, HELOC volume grew by nearly 50% compared to the same period last year, according to a report by the Urban Institute’s Housing Finance Policy Center.

And while available mortgage credit fell in August, according to the Mortgage Bankers Association, HELOCs remain particularly popular among borrowers. “With aggregate home equity still at elevated levels, HELOCs could benefit borrowers who might not want to give up on their current, low mortgage rate but do want to utilize their home equity to support other spending plans,” said Joel Kan, MBA Vice President and Deputy Chief Economist.

In fact, two of our clients that specialize in second loans have both tripled their overall lending volume.

One of them, a lender that specializes in selling home equity loans through its wholesale channel, originated 700 home equity loans in August of last year but in August of this year, it originated just over 3,300 loans. Another client that focuses specifically on home equity loans and debt consolidation more than tripled its home equity loan volume in the past year, from 200 loans last August to more than 700 loans in 2022.

Maximizing Opportunity

For both lenders, the key to success wasn’t just their expertise in home equity products. Their technology also played a role.

Both companies recently transitioned away from legacy loan software in favor of more modern digital lending technology delivered through the cloud. In the case of the former client, this technology allowed them to provide white-labeled home equity products for other lenders and independent mortgage bankers while creating a seamless experience for the borrower. It also enabled them to originate new products like HELOCs with extraordinary speed because automation did all the heavy lifting – pricing, underwriting, disclosures vendor services and more.

While the sudden shift to 20-year highs in mortgage rates creates a bit of turmoil for lenders, it’s undeniable that the market will shift again, shutting down certain avenues for business while opening the door to new ones. Whatever new opportunities lie ahead, those with the right technologies in place will be able to maximize them.

This means lenders will need technology that leverages application programming interfaces (APIs) and the cloud for lenders to create a one-stop shop for all their loan processing needs. With such a platform, lenders are able to originate any loan product for any channel with the same level of automation, while also providing borrowers with a customized, online experience to drive most of the process themselves.  

Digital, cloud-based loan technology that places borrowers first is also reducing the entry barrier for lenders by automating most of the heavy lifting needed to originate new products. These gains in flexibility and efficiency also enable lenders to avoid massive layoffs and scale up business for certain products or loan channels without bringing on additional resources.

With the housing market in transition and the outlook historically slow for the winter months ahead, now is the perfect time for lenders to rethink their technology strategy to take advantage of ongoing demand for home equity, second closed-end mortgages and renovation products—and to gear up for whatever the market brings in 2023.

(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at msorohan@mba.org; or Michael Tucker, editorial manager, at mtucker@mba.org.)